It’s the emerging housing success story that almost nobody knows about: Hundreds of thousands of homeowners who took out record numbers of home equity lines of credit during the boom years of 2005-2008 are defying experts’ predictions of financial catastrophe.
How? By paying their debts. Rather than defaulting on their credit lines at the 10-year “end-of-draw” point when their required payments can abruptly jump by hundreds of dollars a month, the vast majority of owners are hanging in there, finding ways to stay current, often with the help of the banks who lent them the money.
Though Wall Street and credit industry analysts had warned of serious losses when hordes of housing-bubble borrowers hit the 10-year mark, beginning this year, the delinquency rates on these billions of dollars in equity lines are actually declining, not rising.
Here’s why. Between 2005 and 2008, banks extended an unprecedented $265 billion of equity credit lines to American homeowners, according to credit data company Experian. It was all part of the be-happy-don’t-worry days when home values were soaring and hocking your house to pull out cash was all the rage.
By contrast, during the pre-boom years of 2001 and 2003, banks extended around $60 billion in credit lines. Not only were the boom-time lines massively larger in volume, but the average balance of individual lines went supersized, too — into the low $70,000 range.
Most of the boom-era home equity lines — popularly known as HELOCs — featured 10-year initial draw periods, during which only interest needed to be repaid. After the initial period, the lines transformed into fully amortizing loans — interest plus principal — with higher monthly payments.
As the boom devolved into bust and global recession, millions of owners found themselves with minimal or negative equity, and simultaneously were hit with job losses and declining household incomes. To banking and credit analysts, the hundreds of billions of outstanding home equity lines began to look like a giant ticking time bomb. It seemed inevitable that by 2015, economically challenged owners would face payment shocks and the default rate would climb over the coming several years through 2018.
Amy Crews Cutts, chief economist for Equifax, one of the three national credit bureaus, called the approaching deadlines a potential “wave of disaster” for banks and consumers. Fitch Ratings Ltd., the Wall Street bond ratings agency, issued warnings about the “increasing credit risk” to the banking system posed by the upcoming credit line payment increases. One real estate data firm foresaw the situation as a looming “HELOC hell.”
So what’s happened with HELOCs? So far, nothing close to what was forecast. Last week the American Bankers Association released its first-quarter 2015 statistical report on consumer credit performance. Home equity credit lines dropped to their lowest delinquency level in nearly seven years, with just 1.42 percent of borrowers behind on payments. Bank of America, one of the biggest players in the home equity field, said “early stage delinquencies” on HELOCs are around 2 percent. TD Bank, another major lender, declined to provide me a number but confirmed that there is no surge underway in end-of-draw delinquencies.
What’s going on? It appears to be a combination of factors:
o The $5 trillion-plus increase in homeowners’ equity wealth during the past four years alone has improved their financial positions significantly.
o Aggressive and proactive outreach campaigns by the biggest banks to alert borrowers to upcoming payment changes and to offer them a variety of options — from refinancings to term extensions and restructurings — have been extraordinarily successful in keeping delinquencies low.
o And, finally, the broad improvements in the national economy overall — lower unemployment and at least modest growth in wages — have made it easier for many borrowers to pay off their HELOC debts, afford the higher payments, and refinance or restructure credit lines with their banks.
Adam Block, a home equity outreach executive for Bank of America, told me that thanks to a confluence of positive economic factors and a strong outreach campaign, “customers in general have been very focused on repaying their debt” — and that accounts a lot for low delinquencies.
Bottom line: If you’ve got a HELOC scheduled to hit the 10-year mark in the next year or two, make sure you know what the higher payments will be and the range of options you may have to handle them. And if your bank hasn’t reached out to you yet, reach out to your bank.
Kenneth R. Harney of the Washington Post Writers Group is a past member of the Federal Reserve Board’s Consumer Advisory Council and is currently on the board of directors of the National Association of Real Estate Editors. Reach him at KenHarney@earthlink.net.
