Home Equity Loan Delinquencies Are Rising (BAC, JPM)

By Investopedia | August 12, 2016 — 3:21 PM EDT

The 2007 housing crisis might be technically over but its ramifications, in the form of home equity loan delinquency payments, have persisted. Although delinquent mortgage payments have sharply declined recently, more homeowners have become lax in paying off home-equity lines of credit (Helocs) that many took out ten years ago. As a result, large lenders, including the country's biggest banks such as JPMorgan Chase (JPM) and Citigroup are increasingly feeling the pinch of the losses incurred by these unpaid loans according to the Wall Street Journal.

The largest home equity lender, Bank of America (BAC), reported that Helocs, which are loans generally used by borrowers to pay for renovations, college tuition and other expenses, racked up a total of $250 million in balances that were at least 30 days behind payment in the second quarter of this year, a 56% increase from a year before, according to company filings. At JPMorgan Chase, the total amount of delinquent Helocsin the second quarter was $647 million, a 21% increase from the previous year. Citigroup reported delinquent balances at a total of $338 million for the second quarter, a whopping 105% increase from the prior year.

Helocs Dollar Amounts On the Rise

However, despite these mounting losses, banks are still granting home equity lines of credit (or Helocs) to customers, with last year being the highest dollar amount since 2007 said the Journal. But lenders are not being totally reckless either as they are requiring clients to have high credit scores in addition to having at least 10% to 15% equity in their homes. And some banks, like Wells Fargo & Co (WFC) and Bank of America, no longer allow borrowers to pay only the interest on Helocs. (See "Home Equity Loans: What You Need to Know")

Ignored During Recession

During the recent economic crisis, delinquent Heloc balances were relegated to the backburner or ignored as banks concentrated on addressing mortgage defaults, said the Journal. This was done because most Helocs, which allow borrowers to make interest-only payments for the first ten years before principal payments are due the next 15 or 20 years, were taken out a year before and only required minimum payments.

Borrowers often cite job losses, illnesses and other circumstances as reasons behind their delinquent Heloc balances. (See "What to Do If You Can't Pay Back a Home Equity Loan")

Still, these delinquencies might not be a foreboding precursor to larger lenders experiencing "broader banking problems," said the Journal. "It is generally harder to foreclose on a home, for example, if borrowers are paying their primary mortgage on time. Heloc balances, while rising, are small—averaging $55,400 for those resetting this year—compared with regular mortgages."