Up to $79 billion in home equity lines of credit (HELOCs) originated during the housing boom of the mid-2000s could be at elevated risk of default in the coming years, suggests a recent study from TransUnion.
As of December 2013, nearly 16 million U.S. consumers held approximately $474 billion in balances on HELOCs, according to TransUnion, a Chicago-based firm that provides credit information and management services to businesses and consumers in 33 countries on five continents.
Of that total amount, TransUnion indicates approximately $50 billion to $70 billion of those HELOC balances may be at risk of default in the next few years as they reach their end of draw periods.
“Home equity lines of credit were quite popular during the housing boom in the mid-2000s,” said Steve Chaouki, head of financial services at TransUnion in a written statement. “For many people, HELOCs represented a low-interest rate opportunity to borrow against the value of their homes, which were rapidly appreciating at the time.”
By the end of 2013, TransUnion notes that more than 92%, or $438 billion, of HELOC balances had not yet reached their end of draw periods.
But even though an overwhelming majority of HELCOs have yet to enter the period where borrowers must repay the outstanding balance, nearly half of all balances at the end of 2013 were originated between 2005 and 2007 and are nearing the end of their 10-year draw periods.
A majority of those HELOCs (52%) have balances exceeding $100,000, according to TransUnion data.
“The financial shock associated with a HELOC payment increasing to cover both—principal and interest—can cause liquidity issues for some borrowers; this dynamic is driving significant concern in the lending marketplace,” said Chaouki.
Though massive in dollar amount, the $79 billion of HELOC balances represents fewer than 20% of total balances (16.7%).
To identify whether consumers are likely to default on their HELOCs after they reach their end of draw, TransUnion’s study also demonstrated the effectiveness of traditional credit risk scores, which were found to be “immensely powerful” at determining risk in HELOC portfolios, said Ezra Becker, co-author of the study and vice president of research and consulting for TransUnion.
“Our study allows lenders across portfolios to better identify, anticipate and measure how an upcoming payment shock for a HELOC borrower might impact the borrower’s ability to repay not just the HELOC but also his credit card, auto loan and other debt obligations,” said Becker. “In other worlds, we’ve provided a framework for effectively managing that risk.”
Access the TransUnion study.
Written by Jason Oliva