Lenders with home-secured credit lines on their books need to prepare for expiring draw periods based on the borrower’s credit and equity,
During the final-three months of last year, there were $43.03 billion in new home-equity lines of credit that were originated by U.S. lenders.
That turned out to
a whopping increase from the same three-month period in 2010, when HELOC production came to only $20.44 billion.
Experian provided the data in HELOC end-of-draw analysis – Managing risk and anticipating consumer behaviors.
The report indicated that borrowers are paying their HELOCs on time and acting responsibly with their debts.
Experian noted that $29 billion in HELOCs originated between 2005 and 2008 has been paid down during the past 12 months as many of these lines have reached or are approaching their repayment period.
But $236 billion in HELOC debt that was originated during that same period will soon require repayment.
Delinquency
of between 60 and 180 days on HELOCs as of the fourth-quarter stood at just 0.78 percent — near pre-recession levels.
“Consumers with a HELOC in repayment were more likely to both close and open other HELOCs in the next 12 months,” Experian said. “They also were more likely to open or close a mortgage in the next 12 months.”
But the report indicated that borrowers who are nearing the end of their draw period are more likely to become delinquent on their HELOCs.
The report noted that HELOCs that came to the end of the draw period had either a payment increase of 20 percent from December 2014 to March 2015 or had the line closed as of March 2015.
In addition, these same borrowers are more like to default on their primary mortgages and other consumer debt as their HELOC payments rise.
“Many consumers have dealt with repayment well, while others may experience payment shock,” Experian Vice President of Analytics and New Business Development Michele Raneri said in the report. “The best path forward in this situation is for consumers to fully understand this potential payment stress, use resources available to them and to work closely with their lender to navigate these changes.
Experian said that for borrowers with good credit who reach the end of their draw period, lenders can work with them to refinance their HELOCs.
But for good-credit borrowers who have insufficient equity, lenders can extend the terms or provide payment flexibility.
In situations where borrowers don’t have good credit, Experian said that a loan modification, along with a credit education program, might be best.
In any event, Experian recommends that lenders need to monitor their HELOC portfolios and manage consumer behavior accordingly.
