A recent home equity lending study conducted by BenchMark Consulting International and the Consumer Bankers Association has identified areas to help lenders assess their risk when originating loans.
The annual Consumer Bankers Association Home Equity Lending Study, which included 23 participants, found an increase in the number of first liens, an increase in the number of 90-day-plus delinquencies, and an increase in senior borrowing. Of this group, the survey showed 37 percent of the loan originations were first-lien positions. Historically the business has been centered around second-lien requests.
Jim Leath, Consumer Lending and Mortgage Banking Practice Manager for BenchMark, suggests, “A big takeaway for lenders here is the risk mitigation factor. The growth of these first-lien positions in home equity portfolios indicates this is a good time to ensure specific risks have not been overlooked.”
The survey also identified another area for risk management: an increase in the number of 90-day-plus delinquencies. Leath explains, “As we expected, overall delinquency rates were down, because growth can mask some of this activity. The clear increase in 90-day-plus delinquencies implies that we may be taking on some hard-core risk. When those numbers are rising there’s deep concern about charge-offs. Fortunately, at BenchMark we’re finding there are opportunities and very specific strategies lenders can deploy to can get ahead of that curve faster.”
A positive trend lenders may also want to be in front of is the growth of seniors in home equity lending. The survey found that this group is an increasing segment of home equity borrowers, and at higher amounts. “This was a bit of a surprise,” Leath said. “Most people think of seniors as non-borrowers. The pattern we found here was that rather than drawing on invested, fixed income for non-need spending, seniors are looking more to home equity for vacations, luxury items and other purchases. This is an exciting finding, since it represents a new target market for business growth.”
Other findings of interest: for the first time in years, loan growth for home equity (as compared to line growth) increased substantially in 2004, from 9 percent in 2003 to almost 15 percent in 2004. Also, survey responses indicate that the average for borrowers’ appraised home values is well above the median in the market.
BenchMark Consulting International, a division of Fidelity Information Services Inc., is a management consulting firm that aims to improve the profitability of its financial services clients through the delivery of management decision-making information.
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