| The reset of millions of home equity line of credit (HELOC) loans across the country threatens to echo the default epidemic that sparked off the housing crisis. But just as Massachusetts escaped the most extreme highs and lows of the boom and bust, we will likely be spared a major default trough as decade-old HELOC loans begin to reset from interest-only payments to principle and interest. Massachusetts banks appear to be well-prepared for the reset process. The question is whether borrowers are ready.
Massachusetts’ 160 banking institutions are well capitalized and with very few exceptions have good credit quality as measured by institution, says John Carusone, president of Bank Analysis Center in Hartford, Conn. Banks are well-reserved against future losses.
“I don’t think the reset is going to be a catastrophe for [Massachusetts] banks or borrowers,” he says. “I think an inevitable financial adjustment needs to take place, but I don’t think banks are going to suffer significant credit quality deterioration.”
Home equity lending in Massachusetts grew about five percent a year from 2003 to 2013, double the rate of overall residential lending in the state.
HELOC loans that are mature enough to reset this year and beyond were written in 2004 and subsequent years, during which many lenders around the country weren’t asking for evidence of ability to repay. Home value appeared to be on a solid upswing, making a 10-year period before reset seem generous.
On the borrower side, the rising value of Massachusetts collateral – home equity, spurred by a resurgent home market in many, though not all places – works in borrowers’ favor if they are considering refinancing.
The Office of the Comptroller of the Currency (OCC) estimates that the nationwide dollar value of HELOCs due to reset may double between this year and 2017, from $30 billion to $68 billion. But actual numbers vary from the estimate. First, some HELOCs are closed-end loans; but for revolving credit lines, the loan-loss exposure is less definitive and depends on how much borrowers have actually drawn down. Though unused credit is usually considered a liability, it’s not in the same category as an actual default. Last year, the OCC warned of rising repayment risk as the average reset may raise the HELOC payment by hundreds of dollars a month.
Pay The Man
Another wrinkle: charged-off HELOCS still require the borrower to repay. If not, a bank may be able to recover part of the outstanding debt when the property is sold.
Government programs to help second-lien borrowers are not likely to help; a program using Troubled Asset Relief Program funds is no longer available, and Treasury data for loan modifications to date do not distinguish between closed-end loans versus revolving credit loans.
The OCC is urging lenders to re-assess their HELOC portfolios and reach out to borrowers who may be facing significant payment increases. Borrowers could refinance out of the outstanding loan by drawing on new equity, or they could ask for loan forbearance – both bad echoes of the housing boom.
TD Bank’s Mike Kinane, retail lending senior project manager, says the bank reaches out to its HELOC customers at least six months in advance of their amortization date if the customer has not contacted the bank first. “HELOC borrowers should thoroughly read their original contract and determine when their loan will begin to amortize and under what terms. This should be done in advance of the actual amortization date,” he says. Borrowers who understand their amortization terms “can get ahead of the loan’s reset date and meet with their lender to discuss their situation and determine what options make sense for them.”
Email: coneill@thewarrengroup.com
