Are millennials using HELOCs differently?

Definitely, Maybe...  With all due respect to the Ryan Reynolds Kevin Kline flick from a decade back, I'm still unsure about passing judgment on the recent Citizens Bank survey of customers regarding their plans for HELOC proceeds.  The survey showed that, while 70% of the respondents would use those funds for home improvement, Millennials had greater propensity toward alternate applications: 1.8x more likely to avail themselves to time off from work for family care, and 2.1x more likely to pay for a vacation, 2.4x more likely to fund a new business venture.

Maybe?
This observation possesses a certain coherence, that a cohort who came of age having both the ability, through product and tech innovations, and the need, due ever-greater student loan debt load, to manage cash flow in a controlled, granular fashion would continue such behavior into their home ownership life stage.

Maybe Not?
Home improvement spending tends to be episodic, often hitting a multi-year lull after the initial flurry in the months following the home buy.  When matched against reasonable levels of home equity appreciation and the recent vintages of most Millennial home ownership, one can posit that, at the time of survey, this generation would be under-indexed in considering home improvements in the first place.

Definitely, Maybe?
While this particular study may not be conclusive, I'm still of the opinion that the future of home equity usage will be less open-ended blank check and more situational, with balance and duration matched to purpose/context.  To expand on a prior post regarding the recent J.D. Power HELOC study, the first order derivative of digital will be control.  Once consumers have the former, they will desire the latter.  And once they possess the latter, they will be even more dissatisfied with the current state of the HELOC product, especially when compared to their other financial products.

Taking out a HELOC is a consumer's way of loading up on liquidity.  Recalling my experiences in institutional banking, the time to load up on liquidity is when a company is heading into choppy waters, not when everything's great.  With an ever-growing abundance of liquidity options for consumers on the spot market, one wonders if these same HELOC borrowers, who the survey also reveals has having "an overwhelming sense of optimism, with 87% saying they were optimistic about their home’s value," would prefer an alternative that enables more situational/purpose-driven usage.

HELOC "perfect storm"

"Despite record-high levels, new home equity line of credit (HELOC) originations have been steadily declining as a perfect storm of rising interest rates, new tax laws and growing competition from alternative lenders has crimped traditional HELOC growth." (J.D. Power 2019 U.S. Home Equity Line of Credit Satisfaction Study)

This must be one heck of a slow moving storm since the underlying "new normal" had its genesis sometime in 2013 when the traditional lagged correlation between HELOC originations and the Case Shiller HPI started to break.  I had created this visualization a year ago, but this conundrum has, if anything, further under-performed even the lowered expectations.

Much of the reaction to this study has been a freak out around...

(KEY FINDING #1) how consumers are increasingly considering alternate product, two-thirds compared to a bit over 40% a "few years ago," leading to exhortations about...

(KEY FINDING #2) ...the need to go digital.

The peanut gallery has a point here.  As someone who took out a HELOC recently, I can attest that not only is the customer experience every bit as antiquated as that of a decade ago, it has actually, worsened through the inclusion of myriad InfoSec requirements.  While my institution was a legacy bank, even the new entrants are sadly lacking in "digital."  One only has to check out PennyMac's ballyhooed first fully non-bank HELOC product where digital is apparently defined as a form that drives a loan officer to call you.

I'm frankly more interested in the other two findings...

(KEY FINDING #3) "Concerns about interest rates, overextending debt drive shopping behavior: Customers concerned about opening a HELOC are significantly more likely to consider HELOC alternatives." and

(KEY FINDING #4) "Long-term HELOC customers less engaged than new customers: Existing HELOC customers who have had their line of credit for more than two years are notably less satisfied with their lender than are new customers."

These two findings point to a product-market mismatch issue that has been evident elsewhere in consumer finance, where consumer preferences have driven increased usage of debit cards and purpose-driven loans over credit cards.  Consumers are prioritizing control and transparency, while recognizing the costs of open-ended credit.  Moreover, given that consumers' financial priorities will likely change, sometimes dramatically, over a typical HELOC draw period, does it really make sense to keep the line open for such lengthy timelines?  This is a likely cause for the final finding around lower customer engagement/satisfaction over time.

The tech-enabled ready availability of credit, appropriately priced with intelligence on purpose or context, has truly been transformational, but the HELOC segment has, for the most part, been oblivious to this sea change.

Thankfully, this obliviousness is not universal.  Figure's HELOC possesses attributes that address the issues identified in the findings of the study, including: (1) transparency and availability for digital discovery; (2) speedy origination process without need for human handholding; (3) fixed rate/terms providing customers with easy-to-understand exposure; and (4) a generally favorable cost-benefit CX equation that enables consumers to regard taking out a Figure HELOC as situational.  In many ways, Figure has the first HELOC geared around how consumers behave now, not ten years ago.

This year looks to be a banner year for other new HELOC-type products, with Blend, Prosper and SpringEQ all about to unveil their own takes on cracking the conundrum.  I can't wait to see what develops in this space.

Housing finance at a glance - Feb 2019

The Urban Institute's Housing Finance Policy Center February 2019 Chart Book is out.  Some thoughts...

• A very large portion of the first time home buyer (FTHB) cohort are commencing their home financing journey with non-banks. What are non-banks doing to continue and extend those relationships?
• Four out of five FTHB are taking Ginnie Mae loans; and 
• Four out of five purchase Ginnie Mae loans are originated through non-bank channels.
• Despite some debate about consumers being scarred by the housing crisis into refraining from taking advantage of their expanding home equity, there is still demand by consumers to take cash out.  It's just that the traditional home equity loan (or line) does not seem to be much of an option.
• Four out of five refinances entailed the borrower taking at least 5% cash out; and
• The quantum of second liens continues to decline in the face of monotonic household equity gains.
• Non-banks continue to gain share of origination
• 66% of agency mortgage loans are originated through non-bank channels, around five-year highs; and
• While this production is biased towards refinances, the trend is directionally the same.

Ill tides in mortgage production economics

BusinessInsider recently made a good call in highlighting a slide in JP Morgan's 4Q18 earnings presentation as explaining the troubles surrounding the US mortgage business.  I'd like to delve in a bit more deeply...

It's readily evident that both factors highlighted, the mortgage rate spread and retail production costs, are headed the wrong direction, but why?

A rough correlation is evident between the spread and origination volumes.  The evaporation of the refinance business has paired with anemic/flat new home purchase-driven production to drive a system-wide overcapacity that has murdered margins as players fight for slices of a shrinking pie.  Painful, as the industry strives to a new equilibrium that will eventually let the spread recover.

While the spread has been volatile, the retail production cost has exhibited montonic growth.  This cannot be simply explained away as the "impact of new regulations" so declared during the earnings call by Michael Weinbach, the CEO of the firm's mortgage-banking business.  In fact, a substantial portion of these costs, upwards of half, are directly tied to loan officer compensation, which is generally indexed to the size of the loan, a relationship that can be gleaned from an MBA note from last year.