Tag: end-of-draw

As regulators continue to warn financial institutions of the looming risk posed by HELOCs reaching end of draw, many bankers are asking: Why should I be concerned? What are some proactive steps I can take now to reduce my risk? This blog addresses these questions and provides clear strategies that will keep your bank on track. Why should I be concerned?  Just a quick refresher: HELOCs provide borrowers with access to untapped equity in their residences. The home is taken as collateral and these loans typically have a draw period from five to 10 years. At the end of the draw period, the loan becomes amortized and monthly payments could increase by hundreds of dollars. This payment increase could be debilitating for borrowers already facing financial hardships. The cascading affect on consumer liquidity could also impact both credit card and car loan portfolios as borrowers begin choosing what debt they will pay first. The breadth of the HELOC risk is outlined in an excerpt from a recent Experian white paper. The chart below illustrates the large volume of outstanding loans that were originated from 2005 to 2008. The majority of the loans that originated prior to 2005 are in the repayment phase (as can be seen with the lower amount of dollars outstanding). HELOCs that originated from 2005 to 2008 constitute $236 billion outstanding. This group of loans is nearing the repayment phase, and this analysis examines what will happen to these loans as they enter repayment, and what will happen to consumers’ other loans. What can you do now?  The first step is to perform a portfolio review to assess the extent of your exposure. This process is a triage of sorts that will allow you to first address borrowers with higher risk profiles. This process is outlined below in this excerpt from Experian’s HELOC white paper. By segmenting the population, lenders can also identify consumers who may no longer be credit qualified. In turn, they can work to mitigate payment shock and identify opportunities to retain those with the best credit quality. For consumers with good credit but insufficient equity (blue box), lenders can work with the borrowers to extend the terms or provide payment flexibility. For consumers with good credit but sufficient equity (purple box), lenders can work with the borrowers to refinance into a new loan, providing more competitive pricing and a higher level of customer service. For consumers with good credit but insufficient equity (teal box), a loan modification and credit education program might help these borrowers realize any upcoming payment shock while minimizing credit losses. The next step is to determine how you move forward with different customers segments. Here are a couple of options: Loan Modification: This can help borrowers potentially reduce their monthly payments. Workouts and modification arrangements should be consistent with the nature of the borrower’s specific hardship and have sustainable payment requirements. Credit Education: Consumers who can improve their credit profiles have more options for refinancing and general loan approval. This equates to a win-win for both the borrower and lender. HELOCs do not have to pose a significant risk to financial institutions. By being proactive, understanding your portfolio exposure and helping borrowers adjust to payment changes, banks can continue to improve the health of their loan portfolios. Ancin Cooley is principal with Synergy Bank Consulting, a national credit risk management and strategic planning firm. Synergy provides a rangeof risk management services to financial institutions, which include loan reviews, IT audits, internal audits, and regulatory compliance reviews. As principal, Ancin manages a growing portfolio of clients throughout the United States.

Ten years after homeowners took advantage of a thriving real-estate market to borrow against their homes, many are falling behind on payments, potentially leaving banks with millions of dollars in losses tied to housing. Most banks likely have homeowners with home-equity lines of credit (HELOCs) nearing end-of-draw within their portfolio, as more than $236 billion remain outstanding on loans originated between 2004 and 2007. The reality is many consumers are unprepared to repay their HELOCs. In 2014, borrowers who signed up for HELOCs in 2004 were 30 or more days late on $1.8 billion worth of outstanding balances just four months after principal payments began, reported RealtyTrac. That accounts for 4.3 percent of the balance on outstanding 2004 HELOCs. In practice, this is what an average consumer faces at end-of-draw: A borrower has $100,000 in HELOC debt. During the draw period, he makes just interest-only payments. If the interest rate is 6 percent, then the monthly payment is $500. Fast forward 10 years to the pay-down period. The borrower still has the $100,000 debt and five years to repay the loan. If the interest rate is 6 percent, then the monthly payment for principal and interest is $1,933 – nearly four times the draw payment. For many borrowers, such a massive additional monthly payment is unmanageable, leaving many with the belief that they are unable to repay the loan. The Experian study also revealed consumer behaviors in the HELOC end-of-draw universe: People delinquent on their HELOC are also more likely to be delinquent on other types of debt. If consumers are 90 days past due on their HELOC at end of draw, there is a 112 percent, 48.5 percent and 24 percent increase in delinquency on their mortgage, auto loan and credit cards, respectively People with HELOCs at end-of-draw are more likely to both close and open other HELOCs in the next 12 months That same group is also more likely to open or close a mortgage in the next 12 months. Now is the time to assess borrowers’ ability to repay their HELOC, and to give them solutions for repayment to minimize their payment stress. Identify borrowers with HELOCs nearing end of term and the loan terms to determine their potential payment stress Find opportunities to keep borrowers with the best credit quality. This could mean working with borrowers to extend the loan terms or providing payment flexibility Consider the opportunities. Consumers who have the ability to pay may also seek another HELOC as their loan comes to an end or they may shop for other credit products, such as a personal loan.

Over the next several years, the large number of home equity lines of credit (also known as HELOCs) originated during the boom period of 2005 to 2008, will begin approaching their end of draw periods. Upon entering the repayment period, these 10-year interest-only loans will become amortized to cover both principal and interest, resulting in payment shock for many borrowers. HELOCs representing $265 billion will reach their end of draw between 2015 and 2018. Now is the time for lenders to be proactive and manage this risk effectively. Lenders with HELOC portfolios aren’t the only ones affected by HELOC end of draw. Non-HELOC lenders also are at risk when consumers are faced with payment shock. Experian analysis shows that it is an issue of consumer liquidity — consumers who reach HELOC end of draw are more likely to become delinquent not only on their HELOC, but on other types of debt as well. If consumers were 90 days past due on their HELOC at end of draw, there was a 112 percent, 48.5 percent and 24 percent increase in delinquency on their mortgage, auto and bankcard trade, respectively. With advanced data and analytics, lenders can be proactive in managing the risk associated with HELOC end of draw. Whether your customer has a HELOC with you or with another lender or is a new prospect, having the key data elements to obtain a full view of that consumer’s risk is vital in mitigating HELOC end-of-draw risk. Lenders should consider partnering with companies that can help them develop and deploy HELOC risk strategies in the near future. It is essential that lenders proactively plan and are well-positioned to protect their businesses from HELOC end-of-draw risk. Experian HELOC end of draw study

End-of-Draw approaching for many HELOCs Home 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.   Revamp your mortgage and home equity acquisitions strategies with advanced analytics   End-of-draw articles