HELOC Loans Remain Stable

MBA (6/11/2008 ) Palaparty, Vijay
Home equity products continue to maintain lowest average delinquency rates despite slight increases last year, according to the 2008 Consumer Bankers Association Credit Collections & Recovery Study.
The study revealed that home equity loan delinquency rates increased from 0.8 percent in 2006 to 1.1 percent last year. Home equity line of credit delinquency rates rose from 0.9 percent to 1.3 percent during the same period. Last year, home equity loans accounted for 26 percent of accounts and 12 percent of dollars among study participants. HELOCS accounted for 20 percent of accounts and 32 percent of dollars.

According to the latest National Delinquency Survey released last week by the Mortgage Bankers Association, subprime adjustable-rate mortgages drove up first quarter delinquency and foreclosure rates.

“While the foreclosure start rates were up for all types of mortgages, a reflection of the decline in home prices, the magnitude of the national increases is clearly driven by certain loan types and certain states,” said MBA Vice President for Research and Economics Jay Brinkmann.

Subprime ARMs represented 6 percent of the loans outstanding but represented 39 percent of the foreclosures started during the first quarter. Subprime fixed foreclosure starts increased 28 basis points to 1.80 percent and subprime ARM foreclosure starts increased 106 basis points to 6.35 percent.

The CBA report revealed that non-prime accounts in consumer loan portfolios are also on the rise. Brian King, senior vice president and consumer lending practice executive at Benchmark Consulting International, Atlanta, which conducted the CBA study, said the percentage of non-prime accounts in portfolios have been rising steadily since 2004. Last year, 20 percent of total accounts were non-prime— a figure that was 17 percent in 2006, 15 percent in 2005 and 9 percent in 2004.

“There are an increasing number of non-prime accounts in portfolios,” King said. “For the portfolio to increase that significantly—especially among the large portfolio class size ($4 billion and greater), which experienced a 10 percent increase in percentage of non-prime accounts in 2006, institutions are still generating non-prime. However, there are different ways of originating non-prime, servicing it and collecting as well. What institutions need to do is carefully look at policies, procedures and exceptions.

Consumers have expressed satisfaction with HELOCs. Two recent studies by J.D. Power and Associates, Westlake Village, Calif.—2008 Home Equity Line/Loan Origination Study and 2008 Retail Banking Satisfaction Study—show customer satisfaction in the loan origination process for home equity lines of credit and equity loans increased by 14 points to 780 on a 1,000-point scale.

However, recent reports also suggest that banks have cut back substantially on HELOC loans as well as other forms of credit. Several banks have frozen HELOCs, notifying some borrowers that they may not tap the full amount originally provided or capping the line of credit at the current borrowed amount.

King said going forward, overall non-prime originations will decrease. “We have seen the pendulum swing,” he said. “Institutions are tightening credit standards which should create some stabilization.”

The report divided institutions’ consumer loan portfolios based on size, creating three classes: small—portfolios under $1.3 billion; medium, portfolios between $1.3 billion and $4 billion; and large—portfolios greater than $4 billion.

Consumer credit as a percentage of total assets dropped among all class sizes—the most significant drop occurred in the large class size, which experienced a 10 percent drop from 2006 to 2007. Combined, all class sizes experienced a 7 percent decline in consumer credit as a percentage of total assets during the same period.

The dollar delinquency rate increased 36.59 percent last year over 2006 among institutions that participated in both years. The recovery rate declined 19.5 percent from 2006 to 2007 among the same group and gross annual loss rate increased 5.56 percent.

“Key performance measures show that dollar delinquency rates continued the three-year upward trend and increased 24 percent since 2006 year-end,” King said. “Gross charge-off rate in dollars increased 11 percent and recovery rate dropped significantly.”

“Institutions are assessing how they operate in terms of custom scoring models and treatment of accounts,” King said. “Some are looking at making business process improvements as well as policy and procedural changes to help deal with the rise in delinquencies.”

From a technology standpoint, King said institutions are keen to service accounts more effectively and are also looking to outsourcing without increasing staff for interim periods of time. He said institutions are also reorganizing, moving employees from areas such as originations and underwriting to collections for recovery. “More than originations, collections and recovery are more in demand today,” he said