In a time where wages can’t keep up with the worst inflation seen in over forty years, Americans are tapping every source of liquidity from their credit cards to their home equity line of credit (HELOC). Chloe, a startup founded by Eyal Cohen, Ben Guez and Aaron Murphy, helps Americans quickly access a HELOC via a credit card backed by their home equity. The startup is based in Los Angeles, California.
The startup currently has five employees. Chloe was founded in January 2022. At this current stage of the company, their efforts are focused on due diligence and integration with key partners in the home finance ecosystem, building critical member services and collection capabilities. The startup is up mostly against traditional banks that offer HELOCs as competitors. With a recession looming on the horizon, more homeowners will be in need of accessing a convenient line of credit.
Frederick Daso: What are the main factors driving the traditional underwriting process for a Home Equity Line of Credit (HELOC)?
Eyal Cohen, Ben Guez and Aaron Murphy: In the early 2000s, there was a massive rise in HELOC issuance, with home equity debt outstanding rising from $400 billion to $1.2 trillion from 2003 to 2006, which was largely driven by broader mortgage market growth, significant appreciation in home equity values and rising interest rates. Given the massive growth in the HELOC market over the early-to-mid 2000s, banks had little incentive to innovate or implement new technologies, given how profitable the space was for legacy bank originators.
Following the housing market collapse and financial crisis in 2008/2009, there was a significant regulatory response via Dodd-Frank, which placed many regulations on mortgage & HELOC originators. Following these regulations, banks’ origination methods became more bureaucratic with increased friction. Over the next decade, there was a pullback in HELOC issuance by banks, leading to little innovation in the space and limited technological changes. So, today, banks have more regulations and continue to operate with legacy systems and processes.
For the HELOC market today, we are in a similar market environment in that there have been massive increases in home equity values and rising interest rates ( which make cash-out refinancing less attractive because no one wants to refinance their first mortgage anymore), which are leading drivers of HELOC demand. We believe we are at an inflection point in the market, and there will be large increases in demand for HELOCs moving forward.
Daso: Given that there are over 100M homeowners in the U.S., who would be the ideal customer persona or beachhead user group in need of fast access to a HELOC?
Cohen, Guez and Murphy: There are two main customer types that Chloe is initially targeting: 1) Homeowners with some general knowledge of HELOCs and who have a planned use-case for HELOC funds such as a home renovation; 2) Homeowners who are unaware of the HELOC options available but would have a propensity to use a Chloe HELOC for its convenience and lower interest rates compared to unsecured credit cards.
Category One is an ideal Chloe member in that they desire to tap into their home equity but are likely to be turned off by the application and underwriting process required by legacy bank originators. These borrowers are typically super-prime borrowers with substantial home equity values.
Category Two is ideal because these members can benefit from Chloe’s educational tools that can help them better understand their home equity options. and how they can be utilized to grow their wealth and improve their household balance sheets. These members can also benefit from Chloe’s simple application process and our ability to provide smaller credit limits compared to traditional banks. For example, many bank originators have minimum draw amounts ($50k or more in some cases) compared to Chloe, which can offer lower amounts (such as $5k to $10k) due to our lower origination costs compared to legacy banks. These members can start with lower amounts and increase their balances as their comfort level with HELOCs grow. Further, these members, even without an immediate plan for a large loan such as a home renovation, would immediately benefit from Chloe’s low APR card compared to their unsecured credit cards and could be ideal candidates for balance transfers. It’s important to note that, although category two borrowers may have less knowledge of HELOCs, these are still typically super-prime borrowers (over the last two years, the average credit score for new mortgage originations and first-time homebuyers was nearly 800).
Daso: Within this customer beachhead, what are the potential qualitative or quantitative consumer spending habits observed that shape the way Chloe develops its initial product?
Cohen, Guez and Murphy: Both Category One and Category Two borrowers have strong quantitative and qualitative characteristics from an underwriting perspective, including credit scores north of 750, low debt-to-income ratios, meaningful equity in their homes with attractive LTV ratios, access to alternative sources of credit, household incomes above the median for their geography, and more.
Category 1 borrowers, as described above, already have identified a use-case for HELOC funds but could benefit from Chloe’s streamlined application and our credit card offering.
Category 2 borrowers could benefit from education, lower-cost interest, balance transfers, and more.
Borrowers in both categories typically hold meaningful credit card debt. The average credit card debt for households with income levels in the 80th percentile or higher is $10,000.
Daso: How does Chloe shorten the HELOC application process from the nominal 45-days to mere minutes?
Cohen, Guez and Murphy: There are several steps in the application & underwriting process that Chloe can significantly improve upon compared to banks. One is the document collection process; most banks do not have simple electronic methodologies for easy document uploading by applications and instead require in-person meetings with bankers to submit documentation.
Further, Chloe will utilize Automated Valuation Methodology “AVM”) technology for instantly understanding home equity values of an application’s property, significantly reducing time in the application process. Dodd-Frank requires banks to use an approved appraisal management company which entails an appraiser physically visiting the property. Using an appraisal management company can add days or weeks to the process, costing banks several hundred dollars.
Another area of improvement is the underwriting and approval of members based on the collected information. Banks typically must enter in the manually collected documentation and run it through a separate underwriting team within the bank branch. Most don’t incorporate modern financial underwriting tools such as Plaid. Chloe can have the documentation collection and underwriting/approval process done seamlessly through technology.
Another step in the process is the title filing process. All mortgages, including second mortgages, must be filed with the county office. Many offices have electronic filing capabilities, although some do not. Dodd-Frank requires banks to use a dedicated Title company to pull records from the county office and file new titles. Title companies charge, on average, $500 – $1000 for this service, which banks pass through to borrowers, and it adds time to the underwriting process.
Daso: At first glance, the professional makeup of the team seems to cover all the bases one would ostensibly need to build a multi-billion dollar public company in this space. However, how does the Chloe team complement one another personally?
Cohen, Guez and Murphy: To be candid, on a personal level, we are all “cool” in a sense, meaning we are all confident in ourselves, we know how we each add value, and we all have good communication skills, which allows us to joke around and tease each other while also being demanding of one another. This carries through to the culture we intend to build at Chloe and why prospective hires would be attracted to working with us. We have deep respect for everyone and demand deep respect for ourselves personally, which is what we expect from a new team member. We have ultra-high standards for our work quality, but we also can laugh and make building a business fun. And building a company is fun and should remain fun. Yes, building is grueling, filled with uncertainty, and creates periods of tremendous stress, so if you can’t have some fun throughout the journey, you will burn out, especially when pushing yourself as hard as we do on a professional basis.
The caveat to this is that we are all nerdy in a way, too, meaning that we all get super excited about the business and our respective areas of expertise and love to share our nerdy details. In short, we are “cool” nerds looking for others with similar traits.