No Place Like Home Equity: 2024 Lending Insights

0:02 You are listening to Leaders in Lending from Upstart, a podcast dedicated to helping consumer lenders grow their programs and improve their product offerings. Each week, here, decision makers in the finance industry offer insights into the future of the lending industry, best practices around digital transformation, and more. Let's get into the show. Hi, Welcome everyone. I'm Matt Snowe here with another episode of Leaders in Lending here at CBA Live, joined by Mike Shephard, chair of the Home Equity Committee. Welcome Mike. Yeah, thanks, nice to be with you. Yeah. Absolutely, So why don't you maybe start by explaining your role as the chair of the Home Equity Committee. Yeah sounds good. So yeah. So CBA has several committees that they put together, and one of them is focused on home equity lending, and so I'm the chair of that particular committee. Me. It's made up of about forty banks or so, and they're all varying degrees of size, right, which actually is one of the interesting things about the committee is you have very large organizations like US Bank and Bank of America Bank of America participate, but you also have then several smaller organizations and so you know, like I said, it's about forty members and we get together on a regular basis to talk about different areas of the business they're impacting each of us and kind of sharing best practices. Okay, great, And you've been in banking for some time. It's always funny listening to some of the past episodes and how people get into banking, and it seems like almost not many people grow up as you had, like dreaming of being a banker. What's your story a little bit? Was that always a goal career goal of yours of Yeah, so I am a longtime US

1:33 banker. This is year twenty seven at the bank, so I've been around a long time seeing the organization grow in different ways. Yeah. I think we all say we are accidental bankers in some way, shape or form. What's interesting is, you know, my background was actually in call centers and ultimately just got into kind of product development and so started at the bank and at an early stage and really got into product design and have had the fortune to be in a variety of different business units, whether it's out of traditional retail, lending, cards, prepaid things like that. But it's a really interesting I think just space that's focused on like solving customer problems. When the day is done, right and we therevers stuff. They discussion about this yesterday about how banks can help facilitate really the end goal for the consumer and home ownership and saving for whatever they're looking to do in the future, and that I think is always the interesting part is how can we be part of solving the problems that consumers have in mainishing their day to day finances. Yeah.

2:28 I find that's one one of the things I like about conferences es, especially the CBA. It's really centering. It brings you back to, you know, what we're trying to do in terms of solving problems for the consumers. Yeah. And if you think about the theme for this year is for the people, which is you know, right squarely in the center of Obviously we're here to serve customers. Whether they're retail consumers, small businesses, it doesn't matter, right, I mean, for the people is what it's all about. Yeah, definitely. And so maybe back to the committee, tell me more about like the role of the committee. You know, what what do you guys do in terms of policy benchmarking some of the studies you do. Yeah, I think one of the things that's interesting is back to the point that we have such a varying degree of size, right, we're able to really use it as a chance to share what's happening at kind of the macro level. How is each institution looking at this, How are they looking at what's happening, you know, not getting into in anything proprietary, but what's happening in the business, right, And that's the benefit of CBA as a total right to be able to bring together all of the institutions that are part of the CBA family. And so we spend time, right, so we get into kids of monthly meetings, and then we actually have a couple of subcommittees that also ntion that allow us to go deeper into specific topics, whether it's risk or fulfillment or potentially or be on the product side. And so we just get into this routine that allows us to share what's happening. And then honestly, right, you do learn something. I learned something from you know, some of the smaller institutions, and I've heard directly from members about how they learn when they're able to talk directly with large institutions as well.

4:00 And that's ultimately I think is you know, collaboration as a word videos a lot both upon our committee as well as for I think CBA overall. How are we able to collaborate to kind of raise the bar for everybody? Oh? Nice? And I'm sure you know we're all experiencing the impact of the changing and rising rate environment. I'm sure that's a hot topic. Like how are you seeing that impact home equity specifically? Yeah, so home equity. The industry of home equity is interesting because it's obviously been kind of in a state of flux and in a state of fluck for several years now post financial crisis. You know, twenty twenty two was a really strong year for the industry. We saw balances grow for the market overall. Obviously, institutions were seeing some individual success and that was really driven off of if you just remember at the significant and increase in interest rates that occurred, and so cash out refives really dried up, and as consumers wanted to continue deliverage the equity they had on the home, they were able to use that through a traditional home equity loan or home equity lineup credit. Yeah, you know, now you get into twenty three in early twenty four, you know, you have rates that are higher, which then there's a there's a perceptual challenge that consumers still have about you know, in is a rate that is pick a number eight ten percent, which is higher than what they're used to. And so I think we're all then we're seeing that now transpire in originations. We're definitely softer in twenty three versus what we saw in twenty twenty two, and even twenty twenty four is starting a little bit off that same way now on the flip side, I think what we also are seeing though is a significant change and

5:30 reduction and nutrition because people would have historically, if they had an existing home equity account, they may have paid that off as they refinanced their first mortgage, and that refinance activity is slow, which is then providing some relief and some benefit on the home equity balance as side. So while originations maybe slowing, your balances are starting to hold their own because you're you're not seeing as much attrition, okay, and credit quality quality pretty stable through that time for sure. Yeah, I mean I think we definitely have seen I think some changes in the through the door and these are the things that we we actually had a committee meeting on Sunday and we're able to talk a little bit about this. You know, some of the through the door populations are changing, yeah, with a little bit. You know, still very much in kind of the prime space, but but going out a little bit because some of the consumers may have historically used a cash out refi and now they're not.

6:16 They're going to go to a home equity as a way to facilitate the way to extract the equity in their home. But you know, banks are still very sound and their credit guidelines in certainly your determination of credit, your ability to repay, as well as then the collateral valuations a way I'll have to do in making a decision I'm offering that loan. Yeah, and what about like the consumer in terms of like how they think about just the awareness of the product, how they use the funds. You see that changing as things are getting more expensive. Cars are more expensive. I was talking to Mark and Melinda about that yesterday. You know, how are people using the funds that are thinking about home equity as a tool in their financial tool case. Yeah, so these single you know, number one intended use is still about home improvement, not a surprise. And then the second is that consolidation and again meeting get into detail, but I think I've definitely heard some from some of my colleagues that there's an increasing mix towards that consolidation versus home improvement, but it is still the overwhelming intended use is still on home improvement. And you know, and I think we're all then still very kind of optimistic about the future because consumers are locked into very low first mortgage rates and as they are thinking about upgrading their house, they may then use the equity that they have in their home to upgrade it, versus being you know, moving to another house in their neighborhood or into another part of the city that they're in because they want to keep that three percent four percent mortgage rate that they have on their first mortgage. And so, you know, we think there's still,

7:46 you know, between all the tappable equity that consumers have and then kind of very low mortgage rates that does create a really compelling opportunity for an asset class like home equity. Yeah, and I can't remember where this was, but I was talking to someone else too who mentioned like the additions on houses up like building. Yes, you know, vertically is much more popular now because it's it's cheaper them that. Yeah. So one of the use cases that I know several of us are looking at is what they call ADUs accessory dwelling units, And it's a really interesting new kind of use case that's coming around how people can either add a standalone kind of unit in their backyard or potentially doing an addition above a garage or something like that. And it may start out as a as a as a rental property and then could transition into a living space for an elderly parent or something like that to move in.

8:35 And so it really becomes an interesting way to be able to use your existing property, stay in that, use the equity that you have, and then kind of expand over time. Yeah. Are there any other upstream or downstream impacts of things that you guys are forecasting, like changes in the market, home prices, inventory that that are driving that as well? You know, I think everybody is still relatively optimistic about home values right when I can see page or drop off. I think the industry still feels like, you know, it's going to be stable. There's not going to be you know, probably not the same level of home appreciation, but not a big drop off, and certainly there can be very different you know, pockets of the country based off of certain geographies, but overall home press appreciation appears to be quite strong maintaining. And then it really comes down to, right, the consumers comfort in taking on that additional debt, right, because that's the part that I think, you know, back to what we said in more high in rates is part of it than the psychology of right, I'm a comfortable taking on or borrowing another pick a number, right, thirty sixty eighty thousand dollars to be able to do this work, knowing that I have to now have that monthly payment into my budget. Yeah, that's interesting. So the consumers almost become a resource of like a barometer on the industry as well or where they think it's going to go. The wage growth, employment which seems surprisingly resilient still correct, So that's kind of their their sentiment. Yeah, yeah, I mean, if a consumer feels optimistic about their job and and what's going to happen to their house, right, they may feel more comfortable than making these investments. And some of this that also becomes almost forced. Right,

10:07 if you are having your second child, or if you're having you know, kind of an expansion in your family and you need to add additional square footage versus again to you, you can't afford to move to another house, so you're gonna then stay in at existing house with your little monthly payment on your mortgage and then have that additional uh you know payment into it with the home equity. Gotcha. So maybe back to the committee for a minute, like talk more about the member benefits there. Are you collecting data from the banks that are members of that doing benchmarking or what kind of other feedback are you getting. Yeah, so we don't collect, we don't do anything as individual members, and c ME doesn't facilitate that. But there are several kind of consortiums that collect information and then are and and they're used to help kind of give us an idea what's happening in the market, both on the origination side as well as on the balance and the portfolio side, which is important.

10:56 Right. We we tend to spend a lot of time talking about genations and what's happening with new accounts and applications and all that stuff. But so you know, my earlier point, when you have such a change in EU attrition, your portfolio performance and also becomes really important and so you know, the committee then will use insights from companies like that to help then you know, what are we seeing and really driving different behaviors on you know, kind of your through the door profile and an even the kind of some of your pull through rates and things like that. So the Committee doesn't do that companies, but you know there's third parties that will do that, and then you know, many times you will ask them to come in and share what they're seeing for the market so that you know everybody on the committee has that same understanding. Any geographic patterns that the people are saying, not a ton.

11:46 I mean, I think you would expect, you know, kind of the typical and the large metroma halted areas. There hasn't been any major that we're seeing any fundamental kind of changes based off of your again, you're through the door, your credit profiles for start geographies, that's one. Like everybody has felt pretty good about kind of where the markets are at and the biggest variable all that, quite frankly, is just your home appreciation. Yeah, gotcha. Hey there former host Jeff Kellner here to let you know about an exciting opportunity to strengthen your understanding of artificial intelligence and financial services. If you want to better understand the fundamentals of how AI models work and how they will impact the financial services industry, your in luck. Upstart is launched an online course and certification designed to do just that. This course will give you the knowledge you need to leave the conversation about how your organization can best leverage and manage this revolutionary technology. If that sounds interesting, check out the course as it's currently free for a limited time. You can learn more at upstart dot com slash AI Certification. Again, that's Upstart dot com slash AI Certification. Thanks, and now back to the show. Another thing interesting about the CBA is on the floor in sessions lots of presence of regulators. So how do you guys interface with policymakers, regulators and think about your role in that capacity?

13:09 Yeah, I mean certainly that's a key part of what CBA is all about, is their ability to then represent the industry to then help make influence either with regulators or on Capitol Hill through through Dave and Sam and so. Right as there are things that are coming up that they are educating us, which I think is an important part because obviously we're not close to that day in and day out. So we utilize those guys to help educate us of what they're hearing and what they think might be coming up. And then also then how we can then utilize them to be able to influence, you know, if there's something that we want to make sure is accurately represented from a home equity perspective, and some of this may not be home equity specific, right, because it may be about residential real estate, whether it's mortgage or home equity. Can we kind of get lumped into just the broader you know, real estate lending use case, But that's really in a part of how do we use CBA, How does how didn's forty one banks ultimately kind of represent their institutions as well as all institutions to be able to then help influence if there's something coming on the policy side. Gotcha, are there any major changes that you guys are are specifically we're not on what no, right, So obviously there's a lot of other things happening at the Bureau and on the and on the hill and not gonna win at this point. We haven't had anything that's that's coming that that that is you know, on the foreseeable future.

14:31 Gotcha, Yeah, I hope, queen. I think a pretty stable, like reputable product. I know we've also talked about other maybe like unsecure or small dollar lending that you've got some experience in. Maybe share some of the compare and contrast some of those products in your experience, how the consumers are using them, how they're viewed from a regulation. Yeah, well, the day is done, right. I think we tend to spend a lot of time, like we talk a lot about products, and we also need to take a step back and think, I mean, the consumer needs access to money to be able to buy goods and services, and how do we think about those underlying reasons why they need money first and less about products initially, And so unsecured is a great exailple right. If a consumer needs access to thirty thousand dollars, may able to do some work on their house, which is a pretty typical home equity use case. Those are squarely in the sweet spot for some traditional unsecured loans. And so we spent a lot of time.

15:24 One of our sessions yesterday actually was kind of this debate and discussion about unsecured versus home equity, Where does it begin? Where does it end? Obviously, you always want to be thinking about what is in the best interests of the consumer first, and it's not just always about price. It's about convenience and simplicity and cost and all that stuff. And each product has different pros and cons and so we definitely spend a lot of time thinking, Okay, I mean, all the institutions, how does you know a larger dollar amount, a longer term, a monthly payment, interest rate all factor into that solution that makes the most sense for the consumer. But for the industry, you know, home equity and unsecured have done kind of competitors at times and kind of compliments at times. So I think there's this there is a balance there. But certainly, you know, we know that unsecured is, in particular in some of the point of sale situations, are very much used as an alternative home improvement. Yeah. I like that anchoring back, like we started with, you know, what is the consumer need that we're trying to solve, which can be sometimes hard, especially as any organization is going to be broken up organized around products. Right, You're trying to develop something specific to bring to market anything the committee is seeing or are people talking about innovations in you know, how they structure organizations develop products to you know, make it simpler for the consumer to say here's the need I have versus you know, someone going in like you might go into a traditional retail store and say, here's the product I'm looking for off the shelf. Yeah. I don't know if there's anything innovation innovative necessarily, but I think there's much more

16:56 of a mindset of connect acting with your stakeholders within the organization if you don't have unsecured, like how our home equity people connect you with unsecured. And what's interesting about the committee is, you know, we have people that represent home equity and mortgage, and we have people that represent home equity and unsecured, and so like you get very different. Like some people are like, well, I'm thinking about it through the lens of kind of that use case through home equity and unsecured, and others are like, well, I'm thinking about the kind of residents real estate, and I need to be very intentional to talk to my unsecured colleagues, whether that's in you know, kind of unsecure versual home. We also can't lose out of credit cards, right obviously credit cards or right, you know, it can be an enabler for a consumer to make a eight to ten thousand dollars purchase with a really relatively low interest rate. So there isn't necessarily anything innovative in tech that we've talked about, but I definitely hear more from my colleagues about how they're proactively reaching out.

17:52 And also then you know, how are risk people talking? Right, So what is our risk poblicies for unsecured versus home equity? And where is there the larties and where are the differences? So it all is kind of just I'll go back to collaboration, right, Yeah, and that collaboration and coordination at the committee level in addition to and individual institutions. Yeah, and I can imagine that could be really hard, especially in the financial services industry. You'd like a clear answer, like you can't really ab test like if they give this person a personal loan versus a whole equity loan, Like how are they going to perform? What's their long term relationship? That is? That would be an idel state. You got to have a little bit more time, you know, and you could do some creative things around potential some of your marketing pages on your website or things like that. But ultimately, yeah, I mean, the data is done. They need to take a PRODUCTY or a product B. Yeah, and then go down a particular path.

18:41 And another theme I'm seeing this week, and it could be my own bias for the things I'm looking for, is just around artificial intelligence again, the ability to make things more automated, the ability to help serve the consumer, get them their questions and needs answered faster. How are you seeing that come through in the whole equity space. Yeah, I think I think come equity is I'm a baseball guy, right, so I think we're in the maybe the top or bottom of the first inning on our equity side relative to potentially other use cases and other products. Partly because you know this is still a and I think it's right for opportunity, but it's so early, because you know the process is still quite manual. How do you then find ways to be able to use additional data, additional technologies to be able to automate but not then increase your risk or exposure. Sure, and that's the uncertainty that I think a lot of institutions have is how can I bring that in but not then and also then obviously still continue to comply with all the necessary regulations and rules, but not then always forced the consumer to bring us documents.

19:44 So that's an area that the Committee has spent a lot of time on over the years. Is it is just where are there opportunities for us collectively to simplify and automate? And certainly there are some new engines that are doing that and setting up our height and that's good, right. I mean, I think the the industry needs to be pushed to be able to say, how do we then all step up to be able to then deliver some of the similar experiences that that new entrants are providing. Yeah, are you saying like safer areas to start in? Is it verification, is it underwriting? Is it in the you know, the user experience. I think it's going to be more on the kind of on the the collection of documentation. Okay, as your as your starting point, Yeah, I think beyond that, I think it's it gets a little bit tricky, and I think less aptitude or interest in trying some of those things initially. Yeah, yeah, interesting, What are some other trends that maybe you're seeing either in in credit quality in general or again the interpretation of that data through the door population. Is there any Yeah? You know, I think the other thing we spent on quite a bit of time talking about the other day and our meeting was just overall client engagement through activation. And so obviously with a with a my cold line of credit, right we'll give a We'll give a home leutner a line that they can then use when it's convenient for them and when they need it.

21:00 And so we were like, what are we seeing differences in your number of consumers that are taking and draw or using it initially and then long term utilization rates as well? And I think there was definitely that's one that everybody's keep watching because obviously, right we you want to give the consumer access to a line of credit demandle to use over time, but if they don't use it, that is, you know, that doesn't add any value to us initially. So where is there that right balance? And so I think we'll continue to talk through that just what are we seeing and what does that look like based off of different credit profiles in different geographic areas and things like that. It's like, is there anything any you know, core trend that's happening. But that's one that I think we all are watching because you you definitely are starting to see it and we are starting to see some improvement in utilization rates, which then speaks to consumer demand and the interest in using those that open credit to then make these purchases. Okay, is there a lot of interaction with other committees or how I think about the CBA is a whole.

22:00 Yeah, that's definitely an area. So each of us kind of establish some targets and some abjectors for the year, and that's one that we are being much more mindful of. The one the two that we're connecting with is fraud and then CRA because those are areas that are you know, fraud is just an area that we all need to be mindfuluff. It's real and and so what is what is the Fraud committee seen and how can then you know, we kind of work together with them and just begin all in the spirit of joint learning and joint sharing of information. And then the same thing on CIRA, right, I mean, obviously home equity can be used as a way to facilitate cra lending and what are they seeing, how does that work? New rules, all that stuff. So definitely an area we want to be spending a little bit more time on. Yeah, fraud I imagine is one that is pretty safe where everyone wants to make that as minimal as possible.

22:48 So any insight you can share people are probably yeah. And this storically fraud on home equity lines of credit hasn't been a big area for us, you know. Now I think every institution is starting to realize both on the new account of origination side as well as then the existing customer when they have that one hundred thousand dollars line of credit that's sitting out there, what are the tactics one of the things being done to minimize any potential fraud losses through account takeover things like that. So again, in few years ago, was it a hot time scenario that we wanted to spending more time. Interesting so that you mentioned the committee. Obviously a great way to continue to learn are the things I mean selfishly for me, I'm trying to put together a network of things to learn from as well, Like are there thought leaders, publications, things that you follow externally to kind of keep up to date on everything going on. Yeah, that's a good question. So you know, we all are looking at different forms of data at different ports and all that stuff.

23:45 You know. The one that I spent a lot of time on is the New York FEDDOS setting on household debt every quarter. It's interesting, right because it actually gives kind of a complete picture of all that It's not just about home equity. It's about what's happening with mortgage balances, credit card balance is autohole equity and so and then they go a little bit deeper then into some credit profiles and some different transponencies and things like that. And so that to me is you know, we because when the day is done right, the home equity is a part of the consumers that want we'll call it right and and and how does this fit in with what's happening kind of in the bigger picture. So that's when we spent a lot of time on. And then you know, there's there's a variety of things that come through, you know, like through Black Night and Cure and os it other kind of industry groups that are then providing information about what's happening in the market, what's happening kind of in the individual segments that all of us absorbing used to help kind of define what's happening. Okay, great, well, I guess you know.

24:42 The last opportunity for you is anything you want to plug or if folks wanted to get involved in the CBA or on a committee, what's the path for them to do that? Yeah, certainly right. I mean, I think if anybody's interested in learning more about what we do, they can reach out to me. We've got our CBA context as well that we can then put them in contact with. But it's a great group of people. It allows us, like I said, to interact and share and learn and hopefully when the day is done kind of all raise the bar for everybody. Awesome. Yeah, well, I appreciate the time, Mike. It was great to me again, and I enjoy the rest of the shows. And that's good. Thanks. Thanks. Upstart partners with banks and credit unions to grow households and expand consumer lending through its leading AI lending platform. Upstart powered banks and credit unions leverage AI to offer higher approval rates and experience lower loss rates while simultaneously delivering the exceptional digital first lending experience that consumers demand. Whether you're looking to grow and enhance your existing personal and auto lending programs, or you're just getting started, Upstart can help. Upstart offers an end to end solution that can help you find more credit worthy borrowers within your risk profile with all digital underwriting, verification, loan closing, and servicing. It's all possible with Upstart in your corner. Learn more about finding new borrowers, enhancing your credit decisioning process, and growing your business by visiting upstart dot com slash lenders. That's upstart dot com slash lenders