Moody’s Warns Regional Banks to Prep for HELOC “Payment Shock”

Regional banks are facing higher delinquency rates and incremental losses on home equity lines of credit (HELOCs) for borrowers who are about to encounter “payment shock,” according to analysts with Moody’s Investor Service.

Payment shock can happen when HELOC loans start resetting after the initial 10-year interest-only period, at which point borrowers must begin making both interest and principal payments. 

“The majority of HELOCs begin to amortize between 2015 and 2017, which is when the obligors will experience payment shock,” the analysts write in the report. “Most of these HELOCs were originated at the height of the crisis between 2005 and 2007 when credit-underwriting standards were dismal. As such, they are a particular concern.” 

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Ten of the 15 rated US regional banks with the largest HELOC concentrations relative to their tangible common equity—what  Moody’s considers the best measure of loss-absorbing capital—have exposure greater than 100% of their TCE, including TCF Financial, American Savings Bank, First Horizon National, RBS Citizens Financial, and First Citizens. 

In contrast, the median exposure for all rated US banks is 47%. Moody’s recommends identifying borrowers at risk of defaulting on higher monthly payments and working with them to modify the loan terms, even if it results in incremental losses. 

“Fortunately, banks still have some time on their side to address the HELOC payment shock risk,” the report concludes. “Proactive management in the next one to three years is the key to reducing potential losses.” 

Access Moody’s report, “Home Equity Lines of Credit and Future Payment Shock: An Update.”

Written by Alyssa Gerace

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  • Why not just give those who can’t handle the adjustment another 10 year interest only option followed by a 20 year payback? House values are slowly rising so the overall value of the home should still be significantly greater than the HELOC.

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