Fitch: US Home Equity Loan Asset Quality Showing Resilience

The threat of worsening home equity delinquencies among US banks is being mitigated by improving home prices and relatively steady economic conditions, says Fitch Ratings. An expected uptick in home equity line of credit (HELOC) delinquencies, net charges-offs and debt restructuring has not materialized to date, but as more HELOCs enter their fully amortizing payment periods over the next several years, credit quality still has the potential to worsen.

The threat of HELOC delinquencies is noteworthy because the explosive wave of HELOCs that were underwritten by US banks in the 2003-2007 period. In 2004 alone, HELOCs outstanding increased nearly 42%. The product remained tremendously popular over the following several years, and HELOCs today account for the vast majority of overall home-equity portfolios at US banks.

The prevailing HELOC product during the 2003-2007 timeframe had an interest-only period for 10 years, followed by a 10-year repayment period that included both interest payments as well as principal repayment. As borrowers transition from relatively affordable interest-only payments to a more costly fully amortizing payment, Fitch expects some stress for a certain segment of borrowers, especially those with little or no equity in their home or low FICO scores.

Among Fitch-rated banks that have the highest exposure to HELOCs as a percent of common-equity Tier 1, there has not been a noticeable deterioration in the level of nonaccrual loans and late-stage delinquencies to date. Of the eight banks included in the table, which includes the three largest HELOC lenders, only Huntington Bancshares has seen an increase in noncurrent loans.

On a national level, FDIC data shows that of the $484 billion of home equity line balances outstanding at the end of first-quarter 2015, the 90-day past due level is about 2.72%, virtually unchanged from one year ago. Ninety-day past due HELOCs have remained relative stable since reaching a peak of 2.88% in third-quarter 2012. There has also been considerable improvement in net charge offs over the past several years (also seen in the chart). Despite this improvement, 90-day past due and nonaccrual HELOCs, as well as US residential mortgages generally, still remain well above precrisis levels.

Some of the performance to date of these resetting HELOCs is likely attributable to generally improving economic conditions, home price appreciation, consumer deleveraging and more prudent spending. Home valuations nationally have eclipsed 2004 and 2005 levels and are even above the precrisis peaks in many parts of the US. This means that many HELOC borrowers may have at least as much equity in their homes today as they did in 2004 and 2005 when the loans were drawn. With equity available, these borrowers may be eligible for loan restructurings or be more inclined to remain current on their mortgage-related obligations.