HELOCs Made a Comeback in 2013

Home equity lending surpassed 2009 levels in 2013, with $111 billion in new home equity lines of credit (HELOCs) opened. In the fourth quarter, new lending increased 43% from quarter four 2012, according to data from Experian-Oliver Wyman Market Intelligence Reports and Experian’s IntelliView tool.

For those familiar with the events leading up to the financial crisis in 2008, the news that HELOC origination volumes have gone up may be concerning. But this isn’t 2007, which saw record-high HELOC originations of $351 billion. This recent increase is a good sign, according to Alan Ikemura, senior product manager at Experian Decision Analytics.

“This specific product itself is finally coming out of this lull that we’ve been in for the past few years,” he said. “We believe it to be an outcome of an improvement in the (home) price appreciation across the country.”

Being Smart With HELOCs

In the run-up to the housing crisis, not only were more people taking out HELOCs, they were also using them for some extravagant things, Ikemura said.

“The consumer that you see t0day is more responsible with the potential lines,” he said. “It’s still discretionary, but I think it’s more of a need-based thing.” He gave examples of people using HELOCs like ATMs before the recession, and now that people see the value coming back to their homes, they’re maybe looking at HELOCs as a way to make home improvements or to pay for children’s educations.

At the same time that originations are increasing, delinquency rates are falling, which was a general fourth-quarter trend across most credit products. Looking at number of unpaid HELOC dollars as a percentage of HELOC balances, there was a 26% decline in delinquencies from the last quarter of 2012 to the same time in 2013 ($9.6 billion of HELOCs are past due, as of the end of last year).

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Ikemura noted that some analysts look at these delinquency rates with caution, because HELOCs have a draw period (often about five or 10 years) during which the borrower may make interest-only payments. When the repayment period kicks in, the borrower pays interest and repays the principal, i.e. has to pay more. As such, some people in the industry think the delinquency rates may be depressed with many HELOCs not yet in repayment.

“We haven’t seen that effect yet, but that’s something that we’re always going to want to keep an eye on,” he said.

The average credit limit per loan has increased for most borrowers, and it remains mainly a prime and superprime product, but those with poor credit are beginning to see an increased access to HELOCs. The same trend emerged among most other loan types last quarter, which is partially a result of low delinquency rates: Lenders are more willing to extend credit when people pay the bills.