COSTA MESA, Calif.—Another analysis is raising concerns over the potential for rising delinquencies in home equity loan portfolios across the country.
In its latest analysis on U.S. lending trends related specifically to home equity lines of credit, Experian said its data shows that a large portion of HELOC loans, originated between 2005 and 2008 and representing $265 billion, are outstanding and nearing the repayment phase, or “end of draw.”
The loans coming due, or possibly refinanced to a higher rate, could place stress on borrowers and therefore financial institutions, which could see home equity loan defaults sharply rise, a trend previously reported by CUToday.info.
“This analysis is critical as we want to not only help lenders prepare and understand the payment stress of their borrowers, but also give consumers an opportunity to understand what the impact may be to their financial status and how to be better prepared for it,” said Michele Raneri, Experian’s vice president of analytics and business development.
At the end of the HELOC period, the loan terms direct consumers to either enter into a repayment program, which can be structured over time, or pay the loan off in one lump sum or balloon payment, Experian reminded. The study further evaluated what could happen to these loans as well as other loan products and found that consumers coming to the end of draw on their HELOC are more likely to go delinquent — not just on the HELOC loan, but also on other types of debt — as the increase in repayment burden could mean higher monthly payments for the consumer.
Big Problem With HELOC Portfolios
“There is a potentially big problem with home equity portfolios,” said Aite Group Senior Analyst Christine Pratt in a previous CUToday.info report. “That is, 60% of HELOCs need to be addressed by banks and credit unions between 2014 and 2017. Banks and credit unions have to be careful so home equity default rates don’t skyrocket.”
Pratt reminded that these borrowers took out their loans when their home values were high, likely still have large balances, as well as a sizeable first mortgage.
“You now have a problem with lower home values and have to adhere to lending rules that dictate how much collateral a borrower must have to take a home equity loan—and a lot of borrowers won’t meet the standards to receive a new home equity loan, which most of these individuals will need,” explained Pratt.
“Do you leave these loans on the books as closed loans?” asked Pratt. “What if the customer or member says they won’t repay, especially if their house is underwater? And the bank or credit union can’t even foreclose, since the home equity loan is in the second position. You don’t want to write off the loan, but you can’t give the borrower any more money. How do you keep them paying?”
Experian pointed out that HELOCs encountered a large decline during the recession as many borrowers had little or no equity in their homes, but there is an upward trend showing that HELOCs have been increasing steadily since 2010. As of Q4 2014, originations are up 81% to $37.04 billion from $20.44 billion in the same quarter in 2010.
“As home prices have rebounded in much of the country, we’re seeing the same trend with HELOCs,” continued Raneri. “This could be a sign of the economy further recovering, yet there are still concerns about the pre-recession HELOCs that are now in repayment and how that could negatively impact consumers and the economy as a whole.”
HELOC delinquencies are down to pre-recession levels since their high in 2009, which is a trend that is occurring with other credit products as well, Experian reminded. The study shows that the percentage of HELOCs that are in late-stage delinquency — those 90–180 days past due — is down to 0.5% from its highest level of 1.81% in 2009, which can be viewed as a positive sign for the industry, Experian noted.
“While this might seem like the perfect scenario, with both increases in originations and pre-recessionary levels of delinquency, the study also finds that the consumers that are coming to the repayment phase of their HELOC are much more likely to go delinquent on their HELOC and on other types of credit,” stated Experian. “Between 2013 and 2014, there was a 307% increase in the number of 90-day delinquencies on HELOC loans for borrowers that were end of draw compared to just 29% that were not end of draw.”
Delinquencies Extend Beyond HELOC
That relationship extends beyond just the home equity itself, noted Experian, saying borrowers that are delinquent on their HELOCs are more likely to also be delinquent on other loans. Between 2013 and 2014, there were marginal changes in delinquencies on other products (mortgage, auto loan, and auto lease and bankcard trades) for consumers that were not end of draw on their HELOC or paying as agreed on their HELOC at the time of repayment, explained Experian. However, if a consumer was delinquent (90 days past due) on their HELOC at end of draw, there was a 112%, 48.5% and 24% increase in delinquency on their mortgage, auto and bankcard trade, respectively.
“With many consumers entering into this end of draw phase of their loan, financial institutions are reaching out to their customers to make sure they understand and are prepared for this change in their payment structure,” said Rod Griffin, director of public education, Experian. “The financial services industry is providing education to help borrowers develop a plan to manage their payments. Consumers should take advantage of all of the credit education resources available to them to manage these payments effectively, along with the other financial commitments they have.”