April 29, 2013 / 6:27 PM / in 4 years

Fitch: U.S. Home Equity Credit Quality Likely to Worsen in 2014

(The following statement was released by the rating agency) CHICAGO, April 29 (Fitch) U.S. banks with large home equity books will face increasing credit risk next year as 10-year interest-only draw periods for many home equity line of credit (HELOC) borrowers come to an end, according to Fitch Ratings. We regard the level of individual bank disclosure on home equity payment reset risk as generally inadequate. For those banks with relatively large home equity portfolios, disclosures were only made by a handful of rated banks in recent 10-K filings. HELOC borrowers generally face a reset of payment terms after 10 years, when the line of credit matures or converts to an amortizing loan requiring payments of both principal and interest. The need to fund balloon payments at maturity or increased monthly payments will lead to rising defaults when draw periods on 2004-originated HELOCs end next year. Home equity lending surged in 2004 as rapidly rising home prices led to a sharp easing of credit conditions. In 2004 alone, HELOC loans outstanding rose by 42%. Since home prices remain below 2004 levels in most parts of the country, refinancing opportunities for those borrowers are limited. Home equity loan losses have been improving since hitting a peak in late 2009, but net chargeoffs remain high. Further, ratios of loans that are either seriously delinquent or on non-accrual status continue to rise. For a detailed review of these issues and the potential credit implications for large U.S. lenders, see the special report, "U.S. Banks -- Home Equity ReSet Risk Hitting the ReSet Button in 2014," at www.fitchratings.com. Contact: Julie Solar Senior Director Financial Institutions +1-312-368-5472 Bill Warlick Senior Director Fitch Wire +1-312-368-3141 Fitch, Inc. 70 W. Madison Chicago, IL 60602 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. Applicable Criteria and Related Research U.S. Banks -- Home Equity Reset Risk Hitting the Reset Button in 2014 here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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