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Home Equity Lending Trends: AI-based Property Insights Key to Massive Growth Opportunity

Insights from AI-based property intelligence may be crucial to originators, loan traders, and others seeking to unlock new growth opportunities amid evolving home equity lending trends.

While demand for home equity products has pulled back from recent highs, they still represent a lucrative market. According to the Urban Institute, home equity line of credit volumes surged from $38 billion during the first half of 2021 to more than $101 billion during the first half of 2022 before tapering off to a still hearty $60 billion during the last three months of the year. Bankrate projects HELOCs will continue to be attractive compared to credit cards and other borrowing options. 

With mortgage rates still elevated and the residential sector downshifting, 82% of potential move-up buyers say they’re staying put. Factor in growing concerns about a possible economic downturn, and many appear to be looking to tap the $20 trillion in home equity they’ve amassed during the real estate boom. 

And it’s easy to see why. Products like HELOCs offer homeowners a way to draw funds and make interest-only payments on what they borrow versus financing a sizable lump sum all at once through cash-out refinancing. But for originators, it’s a boom that doesn’t come without risks.   

Home Equity Lending Outlook: Shifting Gears

During the first half of 2023, capital market volatility and a string of bank failures tempered demand for HELOCs and other products. What’s more, rates are unlikely to decline much, if at all, this year. But HELOCs still have relatively low rates compared to many other financial products—including personal loans (11.05%) and credit cards (20.49%). That makes them more attractive to homeowners looking to finance home renovations and paying down credit cards. 

Combined with the fact that nearly half of mortgaged residential properties in the US remain “equity rich” and the rise in homeowners opting to stay put over the near-term, home equity loans could prove lucrative to originators seeking to boost revenues (or, in some cases, to stay in business).

Because home equity loans are secured against the value of a borrower’s home, the ability to accurately understand property condition is paramount. Among other things, it can mean trumping competitors by offering lower rates for properties in excellent condition while avoiding bad bets. 

Many see automated valuation models (AVMs) as indispensable to this effort. That’s because these API-based services provide instant property valuations using mathematical modeling based on comparable properties, tax assessments, and in some cases, factors such as historical house price movements and surveyor analysis. 

But there’s just one problem. The data many traditional AVMs rely on is inaccurate or out-of-date—and provides little to no insight into the true condition of a property. In fact, recent tests comparing traditional automated valuation models and AVMs that take house-specific analytics into account found that property condition-adjusted AVMs showed a 7.7% improvement in PPE-10 predictions of on-market valuations. Not taking this into account could easily put home equity lenders and borrowers in a negative equity position.   

So What’s the Solution? 

Some lenders are attempting to solve this by augmenting AVMs with a property condition report (PCR). But besides being expensive and slow in turnaround time, they often miss essential details that impact valuation and loss risk models. Part of the problem is the “drive-by” nature of PCRs. But there’s also old-fashioned, painfully-fallible human subjectivity. 

In our view, there’s a better choice: Modern AVMs and other solutions that leverage AI-based property intelligence increase the speed and accuracy of the assessment process for more profitable business decisions. Today’s most robust solutions, for instance, leverage computer vision, continuously-refreshed aerial imagery, and novel data sources to extract highly-accurate intelligence about property conditions and their surroundings that fill critical gaps in traditional data sources. 

Existing, human-driven visual inspections like property condition reports (PCRs) miss 70% of issues identified by modern, AI-based property intelligence platforms. Home equity originators can use this intelligence to gain objective and current property condition assessments—including features often missed by existing data sets and exterior inspections.

This intel includes the presence of swimming pools, solar panels, and accessory structures. It also assesses the view from the property and proximity to noisy roads, train tracks, or other characteristics that influence property value and marketability. 

Financial institutions and investors best able to capitalize on the booming demand for home equity products will be well-positioned to weather economic turbulence in the year ahead. But they’ll need high-quality, AI-based property intelligence to succeed.

If you’d like to discuss how AI-based property intelligence can benefit your home equity loan origination, reach out to CAPE Analytics today.