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					                                                                                                         Reprinted from the issue of June 26th, 2006

THE REAL ESTATE, BANKING AND COMMERCIAL WEEKLY FOR MASSACHUSETTS                                                           ESTABLISHED        1872

           Are Banks Ready for the Future
              of Home Equity Lending?
             By James D. Jones                                                                       whelmingly, bankers report that their cus-
                                                                                                     tomers’ primary channel choice is bank

  N  OCTOBER 2005, A GROUP OF MASSACHUSETTS                                                          branches (82 percent). So much for the immi-
   community bankers participated in an in-                                                          nent demise of the bank branch!
   teractive electronic polling session de-                                                             Who are today’s most likely customer for
signed to better understand the current state                                                        home equity products? According to our poll,
and the anticipated future of Massachusetts                                                          baby boomers (77 percent) represent the pri-
home equity lending. The session was part of                                                         mary home equity age group. This is not sur-
a Massachusetts Bankers Association home                                                             prising, perhaps, to the so-called “sandwich
equity seminar. Participants shared their                                                            generation” often found juggling the financial
views on Internet lending, competition, cus-                                                         responsibilities for two generations – parents
tomer preferences and demographics. Some                                                             and children.
of the bankers’ views may surprise you.                                                                 To summarize, our poll reflects generally
Clearly, if these home equity lenders are on                                                         low lender and consumer adoption of the In-
target, the future of Massachusetts home eq-                                                         ternet channel, a consumer preference for
uity lending will be dramatically different                                                          bank branches, baby boomers as the primary
than today, requiring that community bankers                                                         customers and healthy bank market shares.
explore new strategies to profitably compete
                                                                 J A M E S D. J O N E S
in the future.
                                                           is founder and president of
                                                                                                     Dramatic Shifts
   Home equity Internet lending by Massachu-                                                            If our respondents are anywhere near the
                                                        First Wellesley Consulting Group
setts community bankers, based on our sur-                                                           mark in predicting the future, Massachusetts
                                                           (, a
vey results, is in its infancy. Fully 50 percent                                                     bankers will see major changes over the next
                                                    Wellesley-based firm that specializes in
of bankers report that their banks do not                                                            five years. Our respondents predict dramatic
                                                    strategy, lending technologies, business
offer home equity loans over the Internet.                                                           shifts in Internet lending, customer behavior
                                                     process re-engineering and customer
Forty percent offer only basic Internet lend-                                                        and competition.
                                                   intelligence for the financial services and
ing sites. Only one out of 10 banks report that                                                         Many bankers (47 percent) predict that by
                                                          real estate finance industries.
they offer advanced Internet lending sites.                                                          2010 more than four of every 10 home equity
Mortgage Internet lending is more established                                                        applications will be taken over the Internet.
in banks, with 65 percent of bankers report-       bankers report healthy home equity market         Only a small majority of bankers (11 percent)
ing Internet mortgage sites.                       shares for their banks in excess of 10 percent.   project continued low levels of Internet appli-
   Internet application volumes are generally      These loans were sourced primarily through        cations. This forecast is exactly the opposite
low. The percent of Internet applications          bank branches and also from Internet and          of today’s Internet volumes of 10 percent or
compared to total applications from all            mail applications.                                less reported by 85 percent of bankers.
sources is reported to be small. Fully 60 per-         Home equity competition appears sharp.           Respondents predict a dramatic shift in the
cent of bankers report receiving no Internet       Eighty-five percent of bankers report that        competitive landscape by 2010. Rather than the
home equity applications. Only 15 percent of       they do not charge their customers closing        continued dominance of today’s major com-
bankers report amounts in excess of 25 per-        costs. However, the majority of banks do stip-    petitors – community and regional banks –
cent of total applications. The small number       ulate prepayment fees. Many community             lenders see tomorrow’s chief competitors as In-
of Internet applications coupled with either       bankers, asked to name their toughest compe-      ternet lenders (41 percent); large, national
the absence of or a very basic Internet lend-      tition, identify other community banks (38        lenders (32 percent); and, to a lesser degree, re-
ing site illustrates the low level of Internet     percent). An equal number (38 percent) claim      gional banks (23 percent). This dramatic shift
adoption by bankers and consumers.                 regional banks are their primary competition.     in competition may reflect the bankers’ under-
   The home equity product line appears,           Interestingly, only 14 percent view credit        lying views about future consumer Internet
however, to be an important business line for      unions as their greatest competition.             adoption, national and Internet lender invest-
community banks. Over one-half of the                  What about customer preference? Over-                                  continued on page 2
2                                                 B   A N K E R     &     T   R A D E S M A N                                  JUNE     26,   2006

ments in Internet lending technology and bank     banks to adjust their future lending strategies.   munity banks will need strong technology
consolidation.                                    Here are several points to consider when de-       partners to compete on par with the propri-
   Interestingly, bankers saw customers fa-       termining what strategies will be most effec-      etary Web sites of mega banks and Internet
voring the Internet channel by 2010 (81 per-      tive for your bank. First, remember that the       lenders. We believe that the best Web sites
cent) over any other delivery channel. If true,   trends in this poll may or may not apply to        will include online applications, real-time de-
the Internet channel preference will com-         your specific bank’s market and customers.         cision-making functionality, risk-based pric-
pletely contradict today’s branch preference      Invest time developing market-specific cus-        ing, eDisclosures, high security and seamless,
(82 percent). What are the major age groups       tomer intelligence to understand what your         electronic data interfaces to loan origination
driving this channel switch? Respondents be-      consumers prefer for products, pricing, chan-      systems and third-party systems.
lieve that baby boomers will adopt the Inter-     nels and service. Analyze the current and fu-         Banks should support the channel choices
net as their primary channel of choice. Not       ture demographics within your lending area.        preferred by their specific customer base –
surprisingly, respondents also believe that       Conduct first-hand customer intelligence by        potentially branch, Internet, mail and call cen-
Generation Xers also will overwhelmingly          age group and other key demographics. This         ter options. Additional investments to inte-
choose the Internet as their primary channel.     detailed research will reinforce or refute the     grate these channels will pay dividends for
Overall, by 2010, bankers believe that baby       premise that your consumers and prospects          bankers who are committed to providing
boomers (57 percent) and Generation X (38         will increasingly prefer Internet loans. Tar-      channel choice to their customers.
percent) will be the primary customer seg-        geted customer intelligence also will enable          Banks also can remain competitive by con-
ments for their banks.                            you to blend the optimal strategies of product     tinuing to reduce costs and eliminate time
   This does not mean that seniors will not       features, pricing, promotions, channels and        from the origination cycle. A greater use of
continue to demand home equity loans and          service to best appeal to your consumers.          automated valuation models and title insur-
lines. Our survey participants forecast that         For bankers convinced that Internet chan-       ance alternatives are two ways bankers can
the primary loan product of choice will be        nel investments are justified, our best advice     reduce time and costs.
home equity products for both seniors (76         is to find established technology vendor part-        Community banks have several compelling
percent) and baby boomers (81 percent) over       ners that share your long-term view of Inter-      factors that continue to work in their favor.
first mortgages, auto loans, credit cards and     net lending. Most community banks will be          Banks have thousands of long-time cus-
personal loans.                                   better served by outsourcing the development       tomers. Banks also have a well-developed
                                                  of Internet lending technologies rather than       knowledge of the local real estate markets
Adopting a Strategy                               building proprietary lending technologies in-      and established branch networks. Banks that
   We see that drastic changes are predicted      ternally. The baseline strength of a home eq-      are able to leverage these strengths with up-
by the bankers involved in home equity lend-      uity Internet channel is the quality of its un-    to-date customer intelligence, strong Internet
ing today. If these changes materialize, the      derlying technology. The technology must be        technology, channel choice and faster and
shifts in customer behavior, demographics         highly secure, reliable and consumer-friendly      less expensive origination cycles will ensure
and competition may require community             with advanced features and functions. Com-         their future lending success.                 ■

                                         Reprinted with permission of Banker & Tradesman.
                This document may constitute advertising under the rules of the Supreme Judicial Court of Massachusetts.

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