Preparing for the End of the HELOC Era
When it comes to the home equity line of credit (HELOC), times have changed.
Before the bubble burst, it was easy for borrowers – and sometimes lenders – to focus only on the promise of a booming housing market, a decade of interest-only payments and the tax benefits of HELOCS. Ten years later, borrowers will soon face much higher payments and a higher possibility for default as the housing-boom HELOCs reset.
The result? Home equity credit lines now likely represent some of the most at-risk loans in a financial institution's portfolio.
Knowing that lenders will soon be on the front lines of the HELOC issue, the OCC recently issued guidance to financial institutions on how to prepare for the potential default risk. The document, "Interagency Guidance on Home Equity Lines of Credit Nearing Their End-of-Draw Periods," encourages financial institutions and borrowers to work together to avoid unnecessary defaults, and outlines components of effective risk management, borrower communication, accounting and reporting.
To address the OCC's expectations and the needs of the borrower, financial institutions need to prepare for the coming HELOC amortizations by using every available resource, including technology. Home equity lines have varying terms, conditions and features, and proper administration of the loans can be difficult without a flexible servicing solution that also provides a total picture of a borrower's credit worthiness and manages the data accordingly.
When data is automatically organized and categorized, it helps ensure the right information is delivered to the right people at the right time. As home equity credit lines reset, there will be many details to track including term and payment changes, interest rate adjustments, payment and statement processing, as well as documenting the communication and options discussed to these resetting borrowers.
Lenders that have access to up-to-date information and specialized reports can gain a clear understanding of potential exposures and help identify borrowers who are most likely to default. The right technology can also support and monitor loss mitigation, debt restructuring and workout plans, when necessary. Consolidating the information in one servicing system of record can be incredibly helpful, especially for financial institutions that are processing thousands of HELOCS.
As these loans transition to full repayment, financial institutions need to understand the principles outlined by the OCC, and have the right systems, policies, and resources in place to walk borrowers through the changes to their loans. While many borrowers will be able to pay as promised, others may struggle. When "payment shock" settles in, financial institutions must work closely with borrowers to avoid unnecessary defaults.