Study Sees Growth in Home Equity First Liens
Serious delinquencies are up, but many home equity lenders are not in a second lien position anymore, according to a recent study.
That rising first-lien share could be a blessing from a risk management perspective, but it also suggests that banks holding home-equity loans might want to re-evaluate risk management policies, according to the survey's authors.
BenchMark Consulting International conducted the survey for the Consumer Bankers Association.
This year's home-equity study showed that 37% of originations were first-lien positions. In 2004, first liens constituted 30% of outstanding home-equity loans among participants in the survey.
Jim Leath, consumer lending and mortgage banking practice manager for BenchMark, said the trend toward more first liens suggests that lenders should make sure they have not overlooked specific risks. The trend also reflects growing marketplace acceptance of first-lien equity loans as an alternative to traditional first mortgage loans from a mortgage company for homeowners tapping into their equity.
Mr. Leath said that lenders making first-lien home-equity loans, which often do not entail the same appraisal and documentation requirements as a home purchase mortgage, should keep an eye on property valuations, for example. Bankers reported an average valuation on homes backing home-equity accounts of $247,000 in the survey, but the National Association of Realtors reports that the average value of a home in the U.S. is $170,000. Mr. Leath urged home-equity lenders to make sure they are "comfortable with the valuations."
The survey also identified an area of concern for risk managers: an increase in the number of loans that are 90 or more days past due.
"As expected, overall delinquency rates were down, because growth can mask some of this activity. The clear increase in the 90-day-plus delinquencies implies that we may be taking on some hard-core risk. When those numbers are rising, there's deep concern about charge-offs," Mr. Leath said.
That's because delinquencies in the 90-day category are more likely to roll over to default than short-term delinquencies.
The survey, which included 23 participating banks, also found that senior citizens account for a growing share of home-equity borrowers. Mr. Leath said this was something of a surprise, since most people think of seniors as non-borrowers.
"The pattern we are seeing here was that rather than drawing on invested, fixed income for non-need spending, seniors are looking more to home equity for vacations, luxury items and other purchases."
The senior home-equity lending does not include reverse mortgage loans.
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