8 things you need to know about helocs

Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending

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8 THINGS YOU NEED TO KNOW ABOUT HELOCSFROM THE RMA CREDIT RISK COUNCIL’S2016 INDUSTRY INSIGHTS


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1. HELOC RISKS

Be aware of the risks of the home equity lines of credit (HELOC)

final draw periods and the potential for rising rates.


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1. HELOC RISKS (CONT.)

HELOCs have distinct risks due to their product structure.


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2. RISK: PAYMENT SHOCKS

A HELOC may subject a borrower to various payment shocks during the product's lifecycle when the payment increases due to:

Changes in interest rate

Additional borrower draws

Entering the repayment

period


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3. RISK: INCREASED PROBABILITY OF DEFAULT

These payment shocks may cause a borrower to experience financial hardship, thus increasing their probability of default.


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4. HELOC REPAYMENT WILL REACH PEAK EXPOSURE IN 2017

A large portion of the industry’s HELOCs have

already entered repayment with peak exposure in 20171.

1 Office of the Comptroller of the Currency. OCC Semiannual Risk

Perspective, Spring 2015


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5. RISK: REPAYMENT PERIOD TRANSITIONS

Lenders must be prepared to deal with this risk when

HELOCs with interest-only draw structures transition to an amortization repayment period,

creating the potential for a significant payment shock.


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6. RISK: MAXIMUM INTEREST RATES WITH NO PERIODIC CAP FEATURES

Many older HELOCs have high contractual maximum interest rates with no periodic cap features (like an ARM) creating the potential

for significant payment shock in a rapidly increasing rate environment.


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7. CRITICAL ITEMS THAT LENDERS MUST CONSIDER

Borrower outreach Contract reviews

Enhanced reporting and

monitoring

Targeted modification programs


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8. PREPARE FOR RISING INTEREST RATE SCENARIOS

With the prime rate at historical lows and the expectation for it to increase over the next several

years, lenders must be prepared for rising interest rate scenarios

where the minimum payments on HELOCs in either the draw or repayment period increase.


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The Credit Risk Council supports professionals who are responsible for establishing, maintaining, or carrying out credit risk management policies.

The council focuses on funded and off-balance-sheet risk management, including capital markets activity, and other forms of credit intermediation and risk mitigation.

About RMA’s Credit Risk Council


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8 things you need to know about helocs

Economy & Finance