Experian Information Solutions Inc., a global information services company, recently released its latest analysis on U.S. lending trends related to home-equity lines of credit (HELOC). The study found that HELOC loans that originated between 2005 and 2008, representing $265 billion, are outstanding and are nearing the end-of-draw repayment phase. This could create hardships for consumers and the entire industry.
“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 VP of analytics and business development.
When the HELOC period comes to a close, the loan terms will either advise consumers to enter a repayment program, which can be done over time, or pay off the entire loan in one lump sum or balloon payment, Experian says. The study also found that consumers that are nearing the end-of-draw on their HELOC loan are more likely to go delinquent, not only on these loans, but also on other forms of debt since the burden of repayment will increase monthly payments for the consumer.
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 percent 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,” Raneri said. “This could be a sign of the economy further recovering, yet there are still concerns about the prerecession HELOCs that are now in repayment and how that could negatively impact consumers and the economy as a whole.”
Since their 1.81 percent high in 2009, HELOC delinquencies are down to prerecession levels, the study shows. The percentage of HELOCs that are in late-stage delinquency, 90–180 days past due, are down to 0.5 percent which is a positive sign for the industry. Between 2013 and 2014, there was a 307 percent increase in the number of 90-day delinquencies on HELOC loans for borrowers that were at their end-of-draw compared to 29 percent that were not end-of-draw.
“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 at 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.”