Garnet Capital Advisors Blog

July 21, 2015

Predicted 2015 spike in consumer delinquencies - will it happen?

Higher interest rates are going to drown borrowers, right? Rate shock will shock the economic system, right? Poor home equity is going to lead to more delinquent borrowers, no?

These warnings, among others, were loudly trumpeted in mainstream media for much of early 2015. The key problem identified was with home equity lines of credit. A number of HELOCs from before the housing crisis are nearing the end of their initial terms, which means many borrowers could be on the hook for large payment increases as these loans entered their amortization period.

This had some analysts arguing that the number of delinquent borrowers will greatly increase in 2015, further straining financial institutions, the housing market and homeowners alike. However, it seems that the warnings have not come true, which could either mean that the loan market data is a bit off, or borrowers are in better shape than anticipated.

Delinquencies down on quarterly basis
According to a recent report from the American Bankers Association, the majority of consumer delinquencies have declined from the fourth quarter of 2014 to the first quarter of 2015. 

Specifically, home-equity loan delinquencies dropped 11 basis points to 3.12 percent over the first three months of this year. HELOC delinquencies fell six basis points, while property improvement loan delinquencies declined three basis points.

"Home equity loan and line delinquencies are tracking the slow and steady improvements in the housing market," explained James Chessen, chief economist for the ABA. "As property values improve, fewer people have negative equity in their homes. Greater household wealth and income gives consumers more breathing room to meet their financial obligations."

Home equity helps offset costs
The biggest reason for the lack of delinquent homeowners is home equity. Following the housing bubble and recession, many borrowers owed more on their homes than they were worth. If that held true today, those with HELOCs could very well end up in financial hot water.

However, home equity has actually been on the rise. According to RealtyTrac, home equity has increased from $6.4 trillion in 2011 to $11.3 trillion in 2014. While still below the recent peak of $13.1 trillion in 2005, the trend is positive. For HELOC borrowers who were watching the years tick by until they faced higher payments, higher equity is a welcomed fact that increases their propensity to pay.

Naturally, more home equity is the best way for HELOC borrowers to avoid foreclosure when it comes time to repay the loan. Even with the increased equity over the past few years, Daren Blomquist, vice president of RealtyTrac, still expects an increase in delinquent borrowers.

"I would expect at least some uptick," he said, according to American Banker. "The worst year for this is really 2016. You have the highest number of resetting HELOCs in that year, as well as the higher percentage of them that are underwater."

So then, were the numbers just off or are borrowers in decent shape? Right now, it feels like the latter. Given an improved economy, wage growth, more home equity and other positive financial trends, borrowers may have an easier time avoiding delinquency than previously thought.