|
Cracks in Home Equity Performance Keep Spreading
By Ted Cornwell
The delinquency rate on home equity loans held by banks increased markedly late last year, and now there is growing concern that the so-called subprime mortgage meltdown, which has already spread to some parts of the prime mortgage world, is spreading beyond just mortgages.
Specifically, the American Bankers Association quarterly consumer loan delinquency bulletin found that delinquency rates on both home equity lines of credit and home equity loans have risen to their highest level in several years. 2.39% of closed-end home equity loans were overdue in the fourth quarter of 2007, a high not seen since mid-2005. 0.96% of HELOCs were delinquent, the highest rate seen since way back in 1997. And given the continued pressure on home equity loans, there's a good chance that the HELOC overdue rate will surpass 1.00% in the near future.
While those numbers are not intimidating on the surface - home equity delinquencies remain modest by the standards of auto loans and credit cards - there are some worrisome signs that consumers are coming under more budget pressure that may push delinquency rates up higher.
The ABA's composite consumer delinquency rate increased to 2.65% in the fourth quarter, up 21 basis points from the third. Sharp increases in auto loan delinquency rates were one of the key reasons for the increase, according to ABA chief economist James Chessen. He told MSN Bulletin that given declining home prices, it is unlikely that we've seen the bottom of the credit cycle in either the home equity sector or the broader consumer debt trend. That's especially true for home equity loans that were originated as "piggy-backs" on a first mortgage, leaving the borrower with little equity at stake when the loan was originated. (And even less now that home prices have declined in many areas).
He said that the recently enacted "stimulus" package will give consumers some fast help, but that the effect will be limited. The Federal Reserve's interest rate cuts will have a stronger beneficial impact, but it will take time for lower interest rates to help stressed out consumers.
"The good news is that banks came into this period of weakness with a lot of capital and had set aside a lot of reserves, so they are well positioned to weather the problems," Mr. Chessen said.
The ABA isn't the only institution noticing deterioration in consumer credit quality. The Federal Reserve Bank of Saint Louis recently published an economic analysis by Kristie Engemann and Michael Owyang that raises concern about rising consumer reliance on credit cards and "payday loans" to make ends meet.
They note that the period from 1980 to 1985 saw a substantial increase in revolving debt usage by households. That period coincided with a dramatic increase in personal bankruptcy filings.
Click here for an archive of stories from the MSN newsletter.
| 
