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The Importance of Restructuring HELOCs before End-of-Draw

End-of-Draw approaching for many HELOCs

end-of-draw HELOCHome equity lines of credit (HELOCs) originated during the U.S. housing boom period of 2006 – 2008 will soon approach their scheduled maturity or repayment phases, also known as “end-of-draw”.  These 10 year interest only loans will convert to an amortization schedule to cover both principle and interest.  The substantial increase in monthly payment amount will potentially shock many borrowers causing them to face liquidity issues.  Many lenders are aware that the HELOC end-of-draw issue is drawing near and have been trying to get ahead of and restructure this debt.

RealtyTrac, the leading provider of comprehensive housing data and analytics for the real estate and financial services industries, foresees this reset risk issue becoming a much bigger crisis than what lenders are expecting.  There are a large percentage of outstanding HELOCs where the properties are still underwater.  That number was at 40% in 2014 and is expected to peak at 62% in 2016, corresponding to the 10 year period after the peak of the U.S. housing bubble.  RealtyTrac executives are concerned that the number of properties with a 125% plus loan-to-value ratio has become higher than predicted.

The Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the National Credit Union Administration (collectively, the agencies), in collaboration with the Conference of State Bank Supervisors, have jointly issued regulatory guidance on risk management practices for HELOCs nearing end-of-draw. The agencies expect lenders to manage risks in a disciplined manner, recognizing risk and working with those distressed borrowers to avoid unnecessary defaults.

A comprehensive strategic plan is vital in order to proactively manage the outstanding HELOCs on their portfolio nearing end-of-draw.  Lenders who do not get ahead of the end-of-draw issue now may have negative impact to their bottom line, brand perception in the market, and realize an increase in regulatory scrutiny.  It is important for lenders to highlight an awareness of each consumer’s needs and tailor an appropriate and unique solution.

Below is Experian’s recommended best practice for restructuring HELOCs nearing end-of-draw:

Qualify

Qualify consumers who have a HELOC that was opened between 2006 and 2008

Assess Viability

Assess which HELOCs are idea candidates for restructuring based on a consumer’s

  • Overall debt-to-income ratio
  • Combined loan-to-value ratio

Refine Offer

Refine the offer to tailor towards each consumer’s needs

  • Monthly payment they can afford
  • Opportunity to restructure the debt into a first mortgage

Target

Target those consumers most likely to accept the offer

  • Consumers with recent mortgage inquiries
  • Consumers who are in the market for a HELOC loan

Lenders should consider partnering with companies who possess the right toolkit in order to give them the greatest decisioning power when restructuring HELOC end-of-draw debt.  It is essential that lenders restructure this debt in the most effective and efficient way in order to provide the best overall solution for each individual consumer.

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