HELOC Lates Down, But Expiring Draw Periods a Concern

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MORTGAGE EXPERT
7 · 02 · 14

One-month delinquency on credit lines secured by residential properties has shown improvement, while originations are climbing. But there is concern about upcoming expiring draw periods.

As of the end of May, delinquency of at least 30 days on home-equity lines of credit landed at 2.4 percent.

The rate of past due payments on HELOCs has improved by 10 percent compared to a year earlier, when the 30-day rate was 2.7 percent.

The statistics were reported Wednesday in Equifax’s National Consumer Credit Trends Report.

Equifax noted that the total credit limit of newly originated HELOCs during the first quarter of this year was $23.4 billion — the highest level in six years. Volume was up 15.5 percent over the same period in 2013.

Seventy percent of HELOCs classified as severely delinquent were originated between 2005 and 2007.

While HELOC delinquency has been on the decline, there is concern among banking regulators about the upcoming expiration of draw period on many HELOCs.

Interagency guidance was provided Tuesday about the challenges faced by HELOC borrowers as they near the end of their draw periods.

The concern is that some HELOC borrowers will find it difficult to transition from the ability to take draws to required higher payments.

The guidance was jointly issued by the Board of Governors of the Federal Reserve System, Conference of State Bank Supervisors, Federal Deposit Insurance Corp., National Credit Union Administration and Office of the Comptroller of the Currency.

The guidance indicated that management should implement policies and procedures for managing HELOCs nearing their end-of-draw periods that are commensurate with the size and complexity of the portfolio. However, analyzing upcoming expiring draw periods can be challenging when existing portfolios are the result of numerous mergers, acquisitions, or origination channels over period of years.

Higher HELOC payments that result from principal amortization or rate resets will place stress on some borrowers, while others will find it difficult to renew existing loans because of changes to their financial circumstances or declines in property values. Special attention should be given to borrowers who have only been making the minimum payments.

Borrowers should be contacted well before the expiration of their draw period. Borrowers should be directed to trained customer account representatives familiar with HELOC characteristics, the borrower and property information needed, and the range of alternatives available.

Since lenders and borrowers can benefit from working together to avoid defaults, financial institutions are being advised to “communicate clearly and effectively with borrowers and prudently manage exposures in a disciplined manner” as draw periods approach expiration.

The regulators advised financial institutions to be prudent in making decisions to renew by conducting thorough evaluations of borrowers’ willingness and ability to repay.

When a modification is prudently appropriate on a loan that is out of compliance, the modification should be structured to bring the loan back into compliance. If a modification is granted because of a hardship, for instance a balloon payment that can’t be made, the loan should be classified as a troubled debt restructuring.

“Prudent refinancing, renewal, workout, and modification programs are generally in the long-term best interest of both the financial institution and the borrower,” the guidance stated.

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Mortgage Daily Staff

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