Home Equity Credit Performance Improves

Some good news emerges from the home equity credit market, which given historic high delinquency rates and negative equity concerns are both unexpected and welcome.

Equifax Inc. of Atlanta reports home equity, auto and credit card loans continued their year-over-year delinquency rate decline in May showing signs of performance improvements not yet visible in many other industries.

Delinquencies in home equity revolving lines of credit decreased from 3.27% in April to 3.09% in May, also down from the 3.44% rate in May 2009.

Yet the good news are marginal and relative since these rates still exceed the 2.52% rate of May 2008 and the 1.28% rate of May 2007.

Overall in delinquency rates the good news is that it is not getting much worse, according to the May 2010 Mortgage Monitor Report from Lender Processing Services Inc., Jacksonville, Fla. It shows both delinquency and foreclosure rates "continue to remain relatively stable at historically high levels," while the percentage of mortgage loans in default over 90 days increased slightly.

The total U.S. loan delinquency rate based on the LPS database of nearly 40 million residential mortgages across the spectrum of credit products shows that month-over-month the nation's home loan delinquency rate increased 2.3% to 9.2% because early-stage delinquencies crept up after seasonal and incentive-based improvements started to wear off.

The number of delinquent loans that "cured" to a current status declined for every stage of delinquency, except in the "greater than six months delinquent" category. This improvement was likely the result of trial modifications made through the Home Affordable Modification Program that transitioned into permanent status.

Equifax values at $112 billion the number of HELOC accounts available to consumers or an estimated 1.3 million lower than the September 2008 peak of approximately 14.5 million accounts.

Equifax's U.S. Consumer Information Solutions president, Dann Adams, says it means credit rationing is continuing "at a much slower pace" across the board and especially in HELOCs.

Apparently, reported home price improvements due to seasonal factors and first-time homebuyer tax credits that helped increase sales are not yet enough to promote this type of credit. But it is encouraging the passage of new legislation (H.R. 5623) to extend the tax credit deadline until Oct. 1, applicable to residencies purchased after June 30, may help improve home prices further this year.

Meanwhile the Equifax May Credit Trends Monitor Report sourced from nearly 200 million files of U.S. consumers using credit also marked the fourth consecutive month when first or primary mortgage delinquencies decreased, though they remain higher than for the same months in 2009.

In May the number of primary home mortgages at least 30 days in default was 7.49%, down 2.7% from 7.69% in April and "significantly higher" than the 7.01% in May 2009 and 4.42% in May 2008.

To keep delinquency rates in check home equity lines are primarily being issued to lower-risk consumers. Almost 82% of the consumers who received HELOCs in April 2010 had Equifax risk scores of 740 and above, up from about 66% in April 2007.

Following declines in home prices and home equity, HELOC originations have declined. In April 2010 originations were 76,700-compared to 73,600 in May. Similarly, average home equity lines of credit have declined over the past two years from $101,125 to $82,120 in April 2010.

Recovery signs are in short supply. For example, Adams says, new bank credit card limits in April were at "just 40% of 2006's $23.6 billion," while personal bankruptcies-both Chapter 13 and 7-increased 10.5% year-over-year in May. And all these factors confirm that lenders continue to be more selective about giving credit. "There is less credit in the system."

At the same time, the total consumer debt dropped 6% from October 2008's peak of $11.5 trillion to $10.9 trillion in May 2010. First mortgage debt in May dropped by $528.9 billion to $8.8 trillion or 5.7% from October 2008's peak of $9.3 trillion.