Between 2004 and 2008, originations peaked thanks to low home prices and relaxed credit standards. Most of us who recall home equity lending’s fever pitch are not shocked when we hear that HELOCs opened between 2004 and 2008 account for 60 percent of today’s outstanding loans. Now, 10 years removed from origination, these loans are beginning to reset into amortization and borrowers will transition from interest-only payments to paying down the principal.
An estimated $221 billion in HELOC loans will hit the market from 2014-2018, but many borrowers are unprepared or incapable to make the higher payments, which can increase hundreds of dollars per month and include interest, principle and a balloon payment in some cases. This once-emerging threat that loomed on the horizon is now very real – delinquency rates on these lines of credit are doubling at their 10-year mark.
Thankfully, I am not the only person that is concerned with the coming waves of HELOC resets. The FDIC, OCC, Federal Reserve Board and NCUA released a financial institution letter on July 1, 2014, which is intended to promulgate risk management principles and expectations that FDIC-insured banks should adhere to as they prepare to field the incoming resets. First, I commend these agencies for proactively addressing this issue, emphasizing the importance of evaluating borrowers and measure their financial capacity to make full repayments. The waves of resetting HELOCs are already here and will have significant impacts on home equity portfolios and first-lien mortgages. The Consumer Financial Protection Bureau requires servicers to notify borrowers of a reset 120 days in advance and many lenders are open to loan modifications and may be willing to discuss this possibility in advance to prevent the borrower from collapsing into financial crisis. However, we need to know more about borrowers so that we can proactively assist those who will have a higher propensity to become delinquent.
Evaluating borrower credit risk is incredibly critical in this process, but can mitigate the end-of-draw exposure within HELOC portfolios when properly executed. Today, there is a sea of comprehensive data, such as property and credit information, that lenders can leverage to pre-approve borrowers who do have the ability to pay. Still, there are many profile specifics, such as employment and income, which are difficult to assess without some degree of borrower involvement. This is where exceptional customer service must be provided. Why make a borrower provide all of the documentation to prove ability to repay, such as paystubs, W-2’s, tax returns when all of this documentation can be secured by the lender with the borrower’s consent? Customer satisfaction is the lender’s life support and is critical to remaining competitive in this market. Borrowers want an easy process and if you don’t provide that, they will go to someone who does.
I encourage all lenders to work to increase communication and transparency, while making sure that they are leveraging the most updated FICO scores, credit attributes, debt-to-income information and other vital data. These attributes empower lenders to better understand their risk exposure and develop modification strategies if necessary.
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