A new regulatory report indicates that a big share of outstanding home-equity lines of credit are expected to reach the end of their draw periods during the next few years, and banks face risk from payment shock and lower home values on this book of business.
Banks are taking longer to rid themselves of troubled loans as a result of soft housing markets, an overhang of distressed properties and deficiencies in foreclosure processing.
“The overhang of severely delinquent and in-process-of-foreclosure residential mortgages continues to significantly challenge large banks with extensive mortgage operations and continues to affect the economic environment for all banks,” the report stated. “While corrective actions are being implemented, flaws in foreclosure processing are exacting large remediation costs, record penalties, and reputational damage for mortgage servicers.”
The findings were outlined in the Spring 2012 Semiannual Risk Perspective from the Office of the Comptroller of the Currency’s National Risk Committee. The report reflects OCC data as of Dec. 31, 2011.
Outstanding HELOC balances are expected to rise from just $7 billion as of the end of 2009 to $11 billion by the end of this year. By 2018 — the total is forecasted at a whopping $111 billion.
As a significant share of HELOCs reach the end of their draw periods over then next several years, the remaining balances will be amortized — typically over 30 years. Around 58 percent of all HELOCs will begin the amortization stage between 2014, when outstanding balances are expected to be $29 billion, and 2017, when the total is projected at $73 billion.
The OCC sees risk from rising interest rates as HELOC borrowers move from adjustable rates to fixed rates. The migration from interest-only payments — between 93 percent and 95 percent of HELOCs that reach the end of their draw periods from 2014 to 2017 are interest only — to fully amortized fixed rates creates the possibility of payment shock.
Another concern is the drop in home values that will make it more difficult for HELOC borrowers to refinance.
