Magazine article Mortgage Banking

The State of Home Equity: Home-Equity Loans and Lines of Credit Have Been Affected by the Same Negative Forces That Have Driven First Mortgages to Record Defaults. Even So, the Home-Equity Product Has Its Own Unique Challenges

Magazine article Mortgage Banking

The State of Home Equity: Home-Equity Loans and Lines of Credit Have Been Affected by the Same Negative Forces That Have Driven First Mortgages to Record Defaults. Even So, the Home-Equity Product Has Its Own Unique Challenges

Article excerpt

When mortgage delinquency rates started to skyrocket in late 2007 and early 2008, home-equity defaults seemed like a relatively minor issue compared with the overwhelming pace of first-mortgage defaults. Things have changed quite a bit since then, and home-equity defaults have joined first mortgages in the spotlight. * But if we go back and look at some numbers, we can see how first-mortgage defaults quickly over-shadowed the more gradually brewing problem with home-equity defaults. According to LPS Applied Analytics data, referenced in this article and in the accompanying figures, between February 2007 and February 2008, the pace of second-lien home-equity lines and loans rolling into the 30-plus-days delinquent category was steadily growing, but by February 2008, the number of first-mortgage loans rolling into the 30-plus-days late category had increased to approximately 10 percent of total loans outstanding. * Because lenders, servicers and investors faced tremendous risk and dramatic losses associated with first-mortgage loans, most of the intensified loss-mitigation focus was understandably concentrated there. Unfortunately, as the economy continued its downward turn and unemployment climbed into double-digits, home-equity defaults became a much bigger problem. They gained increased attention from financial institutions as well as from the federal government. * The Second Lien Modification Program (2MP) was launched in April 2010 to coordinate loan modifications for first mortgages with efforts to modify and lower payments on second-lien home-equity lines and loans, as a complementary program to the Home Affordable Modification Program (HAMP) designed for first mortgages. * Managing and mitigating home-equity line and loan delinquency continues to be an exhausting task. According to SMR Research Corporation, Hackettstown, New Jersey, $988 billion in home-equity loan and line receivables existed in 2009--$740 billion of which was associated with home-equity lines of credit (HELOCs) and $240 billion associated with second-lien home-equity loans.

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As of May 2010, home-equity products are still rolling into the 30-plus-day delinquency category at historically high levels, with second-lien home-equity loans outpacing both first-lien and second-lien HELOCs in terms of early-stage delinquency (see Figure 1). Although the Washington, D.C.--based American Bankers Association's (ABA's) Consumer Credit Delinquency Bulletin highlighted a drop in home-equity loan and line delinquencies in the first quarter of 2010, the seasonality trend appears to have concluded, similar to first-mortgage performance indicators that have begun to tick back up in April and May.

[FIGURE 1 OMITTED]

Clearly, the banking industry still has a long way to go to return to the relatively low delinquency rates typical of home-equity products. While there are often differences in the level of defaults for first-lien and second-lien HELOCs and closed-end loans, reflecting consumer behavior by product type, the overall trend lines for various products often track together.

For example, starting in the spring of 2007, the roll rate from 60-to-90-day delinquency for both second-lien HELOCs and closed-end loans began to climb. It reached nearly 70 percent of loans in early-stage delinquency by June 2008.

During this same period, the roll rate of first-lien HELOCs from 60-to-90-day delinquency dipped downward before its steady climb began in the same month. Even as the other two product types began to stabilize, albeit at historically high levels, the percentage of first-lien HELOCs rolling from 60-to-90-day delinquency continued to climb.

Yet, by the end of April 2010, all three product types were rolling from 60-to-90-day delinquency at very near the same levels in a downward trend (see Figure 2). One can only hope this is indicative of an improvement in the overall economy and that the worst of the delinquencies are behind us. …

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