Home Equity Lines of Credit (HELOCs): A Growing Trend Amidst Increasing Consumer Debt
As American consumers grapple with mounting debt, they are increasingly turning to home equity lines of credit (HELOCs) as an affordable debt solution. This trend, which began in 2022, offers a way to tap into the value of their homes without the need to refinance their mortgages at potentially unfavorable rates. However, despite the growing popularity of HELOCs, banks are losing market share as fintechs and nonbank entities make their mark in this rapidly expanding sector.
The Shift in Market Share
Over a decade ago, at the peak of the Great Recession, banks held more than 80% of HELOC debt. Fast forward to today, and that figure has dropped to just under two-thirds. Banks, once the major players in the HELOC market, appear to be losing ground to fintechs and other nonbanks. According to data from the Federal Reserve Bank of St. Louis, banks currently hold approximately $276 billion of HELOC volume, but nonbanks are quickly increasing their market share. This shift in the landscape may be attributed to banks’ reluctance to reenter the market following the economic uncertainty triggered by the COVID-19 pandemic.
Bank’s Hesitation and the Rise of Fintechs
Several banks, including Wells Fargo and Capital One Financial, exited the HELOC business in 2020. With the economic uncertainty surrounding the pandemic and the subsequent market contraction, these institutions stopped offering the product. While some banks have hesitated to re-enter this market, fintechs and other nonbanks have seized the opportunity, rapidly increasing their market share.
As noted by Meredith Whitney, a Wall Street veteran and head of an investment research firm, banks may be missing out on the resurgence of HELOC opportunities. However, for banks to effectively compete with fintechs, they must offer digital products that are easy to use and efficient. “It’s not as easy as just turning on the switch. They’ve been out of the market for long enough that they have to reenter the market in a competitive, modern way,” Whitney said.
HELOC Demand and Consumer Debt
The rise in HELOC demand coincides with an overall increase in consumer debt. According to the Federal Reserve Bank of New York’s quarterly report on household debt and credit, total household debt grew by $197 billion, or 1%, in the third quarter, reaching a staggering $18.59 trillion. This increase continues an upward trajectory that began in 2014.
However, the rising indebtedness is not necessarily a sign of financial strain for most Americans. According to a New York Fed researcher, the growing popularity of HELOCs likely reflects low-risk borrowers shifting away from more expensive types of debt, like credit cards or student loans.
HELOCs: A Future Perspective
Despite the competitive landscape, the demand for home equity debt is expected to remain high. This is due to borrowers’ reluctance to refinance their mortgages at less favorable rates. As Anthony Stratis, vice president of lending partnerships at Figure Technology Solutions, noted, “There is a lot of demand that the banks aren’t meeting.”
With U.S. home equity nearly tripling since 2009 to $36 trillion, the opportunity for HELOC growth is significant. However, banks must adapt to compete in this rapidly evolving market. As Whitney puts it, “I think we’re still at the very beginning of HELOC growth.”
With the ongoing need for cash on the consumer side and the continued pressure on mortgage refinancing rates, it seems that home equity still holds a prominent place in the consumer debt landscape. However, it remains to be seen if banks can effectively reposition themselves to reclaim their market share and meet this growing demand.
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