More than six in ten lenders surveyed say their organizations place a moderate priority on the home equity line of credit â€śend of drawâ€ť issue, and another 15.9% place high or very high priority on the matter, according to a new survey by the Professional Risk Managersâ€™ International Association.
The association asked about the issue in its quarterly consumer credit risk survey for the fourth period of 2013, just published. The query came in the wake of continued regulatory warnings about the end-of-draw risk of HELOCs. Many home equity line accounts only require payment of interest during the period the line is active. However, typically these accounts come with a time limit, after which draws stop and the consumer must begin paying both principal and interest. Alternatively, the borrower can refinance.
Thatâ€™s the theory, anyway. But the worry is, can they refinance? And if not, can they repay, especially whenâ€”not ifâ€”rates rise?
In its most recent Semiannual Risk Perspective report, the Comptrollerâ€™s Office stated:
â€śDepressed home values in some markets and tightened underwriting standards will exclude some borrowers from market-based refinancing into new draw periods, and the higher scheduled payments will put upward pressure on delinquency levels. OCC expects banks offering HELOC products to establish processes to quantify and address this risk of increased delinquencies and losses. Taking action at this early stage will provide greater flexibility for borrowers and will allow banks to quantify and mitigate a portion of this risk.â€ť
Regulators have pointed out that a large portion of outstanding HELOCs were originated between 2004 and 2008, at the peak of the real estate runup. The Federal Reserve estimates that just short of 60% of those outstanding credit lines will hit end-of-draw between 2014 and 2017.
In a paper in the Fedâ€™s Community Banking Connections series, Michael Webb, managing examiner at the Richmond Fed, wrote last year:
â€śAlthough interest rates are at historical lows today and may remain so for some time, we can expect that this low-rate environment will not last forever. Community banks involved in HELOC lending activity should ask themselves a critical question: Will most borrowers be able to amortize their HELOC obligations in an environment of even moderately higher interest rates, let alone more normalized interest rates?â€ť
Using an example, Webb pointed out that a rate rise to 7% from 4% could more than triple the borrowerâ€™s monthly payments given the rate rise and beginning of the repayment of both interest and principal.
The risk associationâ€™s survey indicated broad awareness of this pending exposure. The association asked respondents what year they anticipated the greatest risks from HELOCs entering this phase:
The remainder of the survey sample didnâ€™t answer the question.
For the present, the surveyed organizations broadly expected HELOC delinquency levels to stay about the same. A plurality of respondentsâ€”47.3%â€”gave this projection. Notably, in the associationâ€™s third-quarter survey, more peopleâ€”53.2%â€”expected no change. However, more of those indicating a direction in the current survey expected delinquencies to fall, rather than increase.
In early January ABA released its quarterly Consumer Credit Delinquency Bulletin. Amid an overall decline in consumer loan delinquencies, ABA reported a fall for HELOC delinqencies as well, to 1.71% from 1.9%.
Lenders seem to be growing more conservative with HELOCs in general. The Winter FDIC Supervisory Insights report recapped the examiner-based Credit and Consumer Products/Services Survey.
The HELOC section of the FDIC graphic, below, circled in red, indicates a significant tightening up.