Five Ways to Capture Home Equity Consumers

thePoint
July 15, 2005

As mortgage refinancing slows, many banks are taking a renewed interest in home equity lending and are trying to attract customers in an increasingly competitive market. Indeed, 64% of participants in America's Community Banker's 2004 Real Estate Lending Survey said they expect to increase their home equity lending portfolios this year, making it the number one growth prospect for mortgage lenders.

Community Banker magazine recently interviewed bankers from across the United States to find out what's on the horizon as institutions work to attract and retain home equity customers.

Presto: It's a Term Loan!

Flexibility is the name of the game for many borrows, and community banks are developing products that meet this need. Reliance Savings Bank in Altoona, Pennsylvania, is working out the details of a new home equity line of credit offering that will give customers opportunities to draw down their home equity lines and turn them into term loans.

Some larger banks are already offering this product in the bank's area, said senior vice president Denny Doll. Reliance Bank, with $249 million in assets, plans to introduce the product as soon as possible.

One community bank that is already offering convertible home equity lines is Woronoco Savings Bank, a $797 million-asset bank in Westfield, Massachusetts. Introductory rates on the credit line are fixed for the first two years, and a portion of the line can be converted to a fixed-term, fixed-rate loan at any time during the draw period, according to the bank's website.

Bundle Loans, But Wisely

Another popular strategy to promote home equity products is to bundle them with other products.

Reliance has had a lot of success with packaging home equity products with first mortgages. The bank has been offering first and second mortgages together for nine years, and has found it's a good way to attract new customers. The bank also has had success with bundling home equity lines and loans with other products, such as checking accounts.

To be sure, not all banks have had positive experiences with bundling first and second mortgages. Quaker City Bank, Whittier, California, used to piggyback its home equity lines with first mortgages, but stopped, because "people didn't use the lines," said Hank Rams, senior vice president of the $1.6 billion-asset bank. It was expensive to issue a line when the customer was not using the product.

Think Portability

In pension circles, portability has been a buzzword for years, reflecting the reality that employees switch jobs and want to take their pensions with them. Could the concept spread to home equity lending, given the American public's ever-increasing mobility? Synergistics Research Corporation thinks so.

More than half of all consumers favor the idea of a portable home equity loan, according to the Home Equity Lending Monitor study from Synergistics. Sponsored primarily by the top 25 banks, the study involved 2,000 homeowners.

Only a few banks currently have offerings that enable customers to transfer their existing home equity product from one residence to the next without reapplying, said William H. McCracken, chief executive officer of Synergistics Research Corporation in Atlanta.

He said innovation is lacking in home equity lending because lenders are fixated on price. "Lenders need to focus on two things—product development and relationship building," McCracken said. "They're not new concepts, but they work."

Lenders that offer portable loans can quickly differentiate themselves from their competitors, McCracken said. Building close relationships with consumers can also give the lender the freedom to develop new products, knowing that their consumers are more likely to remain loyal. Consumers may be willing to stick with their primary institution if they offer a fair price for home equity loans rather than seeking out alternatives, McCracken said.

The Synergistics report found that 20% of homeowners were very interested in a portable equity credit product, and 25% were somewhat interested. Younger homeowners were more interested in the product than older ones. The survey also found that 40% of the homeowners were interested in having both a first and second mortgage with the same institution.

Cross-Sell, Cross-Sell, Cross-Sell

Quaker City, which competes with home equity giants like Wells Fargo and Bank of America in its market, stressed the importance of building relationships. "We try to develop two to three products with each customer," Rams said. Quaker City works hard at cross selling, but it does not try to push certain products. "We try to instill in our loan officers and branch managers that they must be trusted. They discuss options that are best for a customer's needs."

When a bank is competing with giants, service is critical, he added. Quaker City strives to provide the best service in the shortest period of time and is constantly checking to see how it is doing. After transactions, the bank sends the customer a report card to rate the experience. "Constructive criticism is extremely valuable," Rams said.

Reliance Bank also battles several national and regional competitors. "On any given day, you can see three or four home equity specials advertised in our local paper," said Doll.

Reliance Bank competes with larger players by nourishing its relationships with customers. Everyone in the bank has cross-selling goals; employees who work in insurance have referral goals for home equity loans, and vice versa, Doll said. Bank tellers and customer service representatives have a regular schedule for making marketing calls to customers, and they are always looking for ways to cross-sell products when answering customers' calls.

Synergistics' research found that banks have a good opportunity for cross selling home equity products when a customer initiates the call. Close to 50% of homeowners said it was acceptable to be informed about another service when they make a call to the bank. "Something close to 50% acceptance far outstrips the typical acceptance of telemarketing or direct mail effectiveness, which is generally in the 1% or less range," McCracken said.

Synergistics also found that home equity lending is still a very personal business. More than two-thirds of customers apply through a personal contact, primarily at a branch. Quaker City has branches located in Wal-Mart stores, and has found that these branches are a good way to attract new customers to its home equity products.

Don't Dismiss New Channels

Use of the Internet or telephone banking to apply for home equity lending currently represents about 5% of the market, said McCracken. However, these channels are expected to blossom in the next five to ten years.

DeepGreen Bank in Seven Hills, Ohio, is blazing the trail in the online world of home equity lending. The only lending product that this Internet-only bank offers is home equity. Since it started offering home equity products online in August 2000, the bank has closed 48,000 lines and loans worth $4 billion, said Jerome Selitto, chief executive officer. The bank has about $244 million in assets and was recently sold by Third Federal Savings Association of Cleveland to Lightyear Capital, a private equity firm in New York.

DeepGreen offers home equity lines of credit at five basis points below prime, and limits its risk by offering the product only to the most credit-worthy customers. The banks average home-equity customer has a family income of $125,000, is 40 to 55 years old, and has a credit line of $80,000 with an average balance of $45,000 to $50,000, Selitto said.

For banks that are moving toward online banking for home equity lending, DeepGreen's automation statistics are impressive. Eighty-five percent of its home equity customers received unconditional approval within two minutes after the customer hits the submit button. The remaining 15% were generally approved within 72 hours because an electronic evaluation of the property was not available, Selitto said.

The most challenging part of operating on the Internet is the lack of brand recognition, he said. DeepGreen is evolving into a vendor to other banks. Eighty percent of the bank's equity customers come through other banks or mortgage brokers. The bank has relationships with around 4,000 originators and more than 2,500 mortgage brokerage firms. "We allow banks that have the brand awareness to take advantage of our technology platform," he said.

This article was prepared by the staff at the Point for Credit Union Research and Advice and is published online at http://thepoint.cuna.org/. Reprinted with permission.