HELOCs Gain Borrower Interest Despite Fewer Originations

MBA (9/22/2008 ) Palaparty, Vijay
Home equity line of credit product applications and originations decreased 33.8 percent and 26.4 percent, respectively, among small/medium-sized lenders, bewteen the first and second quarters, according to a study from BenchMark Consulting International, Atlanta.
However, the study revealed that from a book-to-look perspective, borrowers' interest found renewal in the second quarter, with the rate rising by 5 percent to 49 percent from 44 percent in the first quarter,

“From the second quarter of 2007 through this year's first quarter, originations were fairly constant, increasing 6.25 percent; applications increased 32.75 percent over the same period,” said Brian King, senior vice president at BenchMark Consulting. “However in the second quarter, applications and originations dropped significantly. Overall, the ability to book new originations for HELOC products for the small/medium group, however, has been fairly consistent over the past five years.”

Furthermore, the study revealed that among large lenders, HELOC applications dropped 55 percent between the second quarter of 2007 to the second quarter this year. “With tightening of credit standards, tougher underwriting guidelines and less direct marketing focus, it is understandable why applications are down so significantly,” King said.

The book-to-look rate also degraded among large lenders, decreasing from 43 percent in the second quarter of 2007 to 37 percent a year later. “Typically large lenders will receive more applications with lower credit scores and that increases the number of applications, but the approval rates are lower so there is a lower book-to-look rate,” King said. “It is interesting that the large group’s book-to-look rate is lower than that of the small/medium group, which impacts efficiency in the loan originations areas.”

In terms of distribution by channel, the branch was most popular among borrowers. Seventy-six percent of borrowers applied for a loan and 74 percent of loans were originated among the small/medium group. Among originations, the internet accounted for only 1 percent of transactions and the phone accounted for 14 percent. The broker channel disappeared by the second quarter in both small/medium and large lender groups.

Among the large group, the internet channel was more popular. “However, for the internet channel, we also see the impact of pull-through rate with 13 percent of all applications but only 6 percent of all originations,” King said. “So while this channel has potential, the pull-through rate continues to be a challenge, possibly due to the proliferation of aggregators in this space.”

In terms of defining prime borrowers, small/medium respondents were more conservative. Sixty-seven percent of the small/medium group established cutoff points of FICO scores greater than 700 or greater than 720, while those responses were not provided in the large group.

“This may explain in part why the credit cycle appears to have a more severe impact on the large lenders,” King said. “However, what is interesting is that this is recent information—second data as of the end of June. To see such a drastic different in the definition of “prime” is interesting.”

Analysis of credit score distribution among both small/medium and large lenders yielded similar results. "Lenders typically have a higher pull-through percentage for higher credit scores versus lower credit scores,” King said.

The study revealed that 56 percent of the applications had FICO scores of 720 or higher, while 79 percent of originations had FICO scores of 720. Comparatively, 12 percent of applications had less than a 600 FICO score, while only 1 percent of originations were in the same band. “The higher the credit score, the more likely the borrower is to make it from application to origination, which increases the book-to-look rate and profitability,” King said.

“Underwriting restrictions have tightened and they will remain that way,” King said. “It will make it difficult for some borrowers to get HELOCs, but there is still plenty of business out there. With the reduction in the brokerage space, especially, banks have more business opportunity now.”