Banks Report that Fewer Home Equity Loans Are Delinquent

The performance of home equity loans improved in the fourth quarter of last year, but home equity is no longer head of the class among the consumer credit categories.

The rise of B&C credit quality lending has tarnished the home equity sector a bit, which once outperformed all other consumer credit sectors at banks but now is in the middle of the pack.

The American Bankers Association reported that 2.5% of closed-end home equity loans were delinquent at the end of last year, down two basis points from the third quarter. The delinquency rate on home equity lines of credit slipped nine basis points to 0.43% from 0.52%. HELOCs had the lowest delinquency rate of the eight consumer loan types tracked in the ABA survey.

But the delinquency rate on closed-end home equity loans exceeds the delinquency rate on auto loans. The delinquency rate on direct auto loans dropped to 2.36% from 2.46% in the third quarter.

That's a change from the 1990s, when closed-end home equity loans almost always outperformed auto loans held by banks.

ABA senior economist Keith Leggett told NMN that differences in the credit quality of borrowers probably account for the disparity in delinquency rates between home equity loans and HELOCs. Increasingly, closed-end home equity loans are serving B&C credit borrowers, whereas bank HELOCs continue to serve a predominantly "A" credit constituency that is more skilled in financial management, he said.

He also noted that according to data from the Federal Reserve, home equity lending by banks has been rising. Banks increased their home equity loan portfolios by $300 billion between the end of 2001 and the end of last year.

The delinquency rate on home equity loans, while down in the most recent quarter, had been trending upward since mid-2002. Between 1990 and the end of 2002, the delinquency rate on home equity loans never exceeded 2%. It has remained higher than that since crossing the 2% threshold early last year.

Mr. Leggett said he does not think the rise in home equity loan delinquencies is alarming, however. He said it reflects the soft job market, which many economists expect to improve in future quarters.

He also said the home equity delinquency trend is consistent with the home mortgage delinquency and foreclosure statistics tracked by the Mortgage Bankers Association. The rise in delinquencies may in part reflect underwriting changes that have been made to serve more consumers.

"We are at record levels of homeownership. To raise that homeownership rate to record levels, you have to push the envelope a little bit," he said.

Overall, he said the fourth-quarter data shows improvement in the consumer credit picture, with delinquencies falling in every loan category. The exception was bank credit card accounts, which are not included in the ABA's composite consumer loan delinquency ratio. The composite also excludes lines of credit.

The composite ratio of closed-end installment loans 30 days or more past due dropped to 1.89% of all accounts at the end of last year, the lowest it has been since 1995.

Credit card delinquencies rose significantly to 4.43% of accounts on a seasonally adjusted basis, surpassing the previous record of 4.09% in the third quarter. The ABA said the rise in card delinquencies takes some of the gloss off of what would otherwise have been an outstanding quarter.

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