Experian, one of the three national consumer financial data firms, reported a coming wave of drawdowns in home equity loans could provide both a risk to the overall financial system as well as an opportunity for financial institutions that are able to help consumers address the challenge.
The data firm reported that the majority of HELOCs opened between 2005 and 2008 will begin to enter their drawdown periods soon, and they represent $265 billion in indebtedness overall.
"This analysis is critical as we want to not only help lenders prepare and understand the payment stress of their borrowers, but also give consumers an opportunity to understand what the impact may be to their financial status and how to be better prepared for it," Michele Raneri, Experian's vice president of analytics and business development, said.
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Experian said risk entered the picture on these loans because consumers whose loans go to into the repayment period are much more likely to become delinquent on them as well as other loans.
"Between 2013 and 2014, there was a 307% increase in the number of 90-day delinquencies on HELOC loans for borrowers that were end-of-draw compared to just 29% that were not end of draw," Experian reported.
Experian noted that between 2013 and 2014, delinquencies on other products (mortgage, auto loan, and auto lease and bankcard trades) for consumers that were not end-of-draw on their HELOC, or paying as agreed on their HELOC at the time of repayment, remained marginal. However, if a consumer was delinquent (90 days past due) on their HELOC at end-of-draw, there was a 112%, 48.5% and 24% increase in delinquency on their mortgage, auto and bankcard trade, respectively, Experian added.
"With many consumers entering into this end-of-draw phase of their loan, financial institutions are reaching out to their customers to make sure they understand and are prepared for this change in their payment structure," Rod Griffin, director of public education for Experian said. "The financial services industry is providing education to help borrowers develop a plan to manage their payments. Consumers should take advantage of all of the credit education resources available to them to manage these payments effectively, along with the other financial commitments they have."
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