Home equity line of credit delinquencies and net charge-offs have not increased as expected, largely due to the beneficial impact of improving home prices and steadier economic conditions, according to a report from Fitch Ratings.
The Fitch report noted that among the eight banks with the highest exposure to HELOCs or largest HELOC portfolios, only one (Huntington Bancshares) has experienced an increase in noncurrent loans. This flies in the face of prevailing logic, based on the prevailing product design for HELOCs during their heyday from 2003 to 2007.
During that time, HELOCs became extremely popular. Fitch found that in 2004, the amount of HELOCs outstanding jumped 42%. This product remains popular and continues to represent the majority of U.S. banks' home equity lending portfolios.
The products sold during the 2003-2007 period mostly had similar timeframes: they had a 10-year, interest-only period, followed by a 10-year repayment period with interest payments and principal repayment. Since we have entered the realm where most of these loans are moving to the second half of their lifespan, Fitch said it expected some borrowers to feel stress, particularly those with low home equity or credit scores.
Nonetheless, only 2.72% of the $484 billion of home equity line balances outstanding at the end of the first quarter were 90 days past due, barely different from the year prior.
These low delinquency levels can be attributed, in part, to current economic conditions. Home values are typically higher than their levels in 2004 and 2005 in most parts of the country, and in some areas prices have even exceeded their precrisis levels. Consequently, this has left borrowers with equity that could go toward loan restructurings or leave them more inclined not to become delinquent, Fitch said.
