Case Study: Home Equity Loans Pricing
Situation: A bank with a $30 billion home equity lending portfolio was concerned that income growth was not keeping pace with balance growth. The bank employed a “spread over FTP” approach to pricing across its footprint with only moderate tiering of price by balance level and no differentiation for risk. Bank had a limited understanding of relative price position across the full range of its market/product/customer combinations.

Key Findings: The bank was mispriced across most risk tiers—underpriced for riskier credits and overpriced for many low risk customers, leading to adverse selection. Price position varied widely—and unintentionally—both within and between markets. Failure to incorporate an elasticity-based view of demand resulted in offering discounted pricing to inappropriate customers—effectively giving away spread without adequate pick up in volume and leading to a reduction in net income.

Action Taken: Novantas developed a complete risk, profitability, and elasticity-based pricing system that resulted in a pricing system with over 1,500 discrete price points. Bank optimized its risk-adjusted income by selectively targeting “harvest” and “grow” segments with price increases or reductions with a full understanding of the anticipated impact on acquisition balances.

Results: Post ramp-up, bank saw overall home equity net income rise by ~10%; Monthly originations increased by ~5%; Pull-through rates rose from 45% to 55%; Average risk-profile improved: FICO +20 points, CLTV -8%.