What Banks and Credit Unions Can Do To Help Reduce HELOC Delinquency Risks
With better data and analysis, lenders can be more prepared for home equity lines of credit recasts — and even take advantage of HELOC recasts to aid business growth.
Here’s an interesting statistic: Over half of the home equity lines of credit (HELOCs) in the market — roughly 5.8 million — were originated during the housing boom of 2004 to 2008, a time when lending standards might have been lower than in the past.
The first of these housing-bubble HELOCs began recasting as amortized closed-end loans in 2014 and will continue to recast through 2018. That means some borrowers have begun making payments that include both interest and principal. The higher payments can be a challenge for some borrowers whose incomes and house valuations continue to be weighed down by a crawling economy.
As HELOC payments rise, banks face the prospect of more delinquencies. For example, during the draw period, a borrower owing $70,000 on a HELOC probably is paying just under $200 a month to cover interest. Once the loan recasts, the required payment will be nearly $700 per month — a hefty increase, especially for the most economically vulnerable borrowers.
It’s important for lenders to understand which HELOC borrowers are more likely to fall into delinquency — and which are more likely to be targeted by competing banks. They have the ability to check consumer databases and property profiles, such as Equifax repositories, in an effort to determine a borrower’s location and home value. They can use their own payment records, combined with broad consumer data, to help determine how well a borrower has been paying on current debts or turn to a third-party verification source, such as The Work Number® database, for help in finding out a borrower’s current employment information.
These insights not only can be valuable for assisting to determine delinquency risk, but also for helping assess which borrowers might be attractive to competitors – which may be a good time for lenders to fine-tune their marketing strategies when permitted. For example, if creating a prescreen list, not only are lenders looking for consumers with certain credit score thresholds, but they might need visibility into property to determine if the potential borrower meets their criteria. When executing Invitation to Apply (ITA) campaigns, non-regulated consumer wealth and property data can be used to help identify a broad group of consumers who might be likely to respond and meet approval requirements for a specified loan type. Use of property data only can support this type of campaign, but using consumer wealth measures may provide more transparency for specific programs such as affluent or Community Reinvestment A (CRA) lending.
Finally, increased competition and low rates make retaining borrowers more key in this environment. Using a trigger such as a listing flag can help indicate that the customer is possibly looking to purchase a new home and may be applying for a mortgage. Current borrowers in a lender’s portfolio with rising home values may be good candidates for new HELOCs or line increases – and monitoring available equity may aid to keep the lender one step ahead of the competition.
Armed with appropriate information and analysis, lenders can better craft strategies to help prepare for HELOC recasts — and even leverage them to aid business growth. Want more detailed information? Click the links below to download recent webinars hosted by Equifax.
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