An improving housing market is helping to reduce delinquencies on home equity loans, according to the American Bankers Association.
ABA reported Thursday that closed-end home equity loans that are 30 days or more past due fell to 3.58% in the third quarter from 4.2% in 3Q 2012.
The ABA consumer delinquency survey shows the 30-day delinquency rate on home equity lines of credit fell to 1.7% in the third quarter from 1.9% in 3Q 2012.
Rising home prices and sales are providing some relief for delinquent home equity borrowers, according to ABA chief economist James Chessen. “It is now a little easier for some people to refinance or sell their houses,” he says
The chief economist also noted that delinquencies on eight types of closed-end loans (like auto loans, personal loans and home equity loans) fell to its lowest level since ABA started tracking consumer delinquencies several decades ago.
“This is very positive news,” Chessen says. It shows “consumers are doing a very good job of managing their finances.”
Banks held $518 billion in HELOCs on their balance sheets as of Sept. 30 and $88 billion in closed-end second mortgages, according to the Federal Deposit Insurance Corp.
Regulators are very concerned that HELOCs originated five to 10 years ago will “recast” over the next few years and many homeowners will not be able to afford the full principal and interest payments. Before recasting, borrowers are just required to pay interest on the HELOC each month.
Regulators want the banks to refinance these HELOC borrowers before the Federal Reserve begins to raise interest rates, according to ABA senior economist Keith Leggett. “The bank regulators will be monitoring this market very closely,” he says.
Net charge-offs on HELOCs totaled over $1.15 billion during the third quarter, compared to $4.17 billion in the 3Q 2012, according to the FDIC.