Between 2003 and 2008, outstanding home equity loans and HELOCs at credit unions rose from $51.7 billion to $98.7 billion.
On April 29, Fitch published a report, U.S. Banks -- Home Equity Reset Risk Hitting the Reset Button in 2014.
The report noted that during the mid-2000s many HELOCs originated featured an interest-only draw period up to 10 years, followed by either a balloon payment at maturity or an amortization period requiring principal and interest payments.
The interest-only draw period is now coming to an end. When this occurs, HELOCs will begin to mature or convert to fully amortizing loans. Fitch notes that it is this maturity or conversion that presents the increased credit risk.
Credit risk could emerge from two areas. First, borrowers facing balloon payments may have difficulty refinancing if they don't have any equity in their homes. Second, as HELOCs recast to fully amortizing, some borrowers will be confronted with payment shock. Also, when rates begin to rise, these borrowers will be confronted with a interest rate reset which will lead to higher debt payments.
While I don't know the specific practices of credit union, I suspect many HELOCs underwritten by credit unions possessed the same features.
As of December 31, 2012, there were 160 credit unions with at least $100 million in assets that reported more HELOCs than net worth. Six credit unions had HELOCs to Net Worth exposure in excess of 300 percent. Another 16 credit unions had a HELOC to Net Worth ratio between 200 percent and 300 percent.
The following table ranks credit unions with at least $100 million in assets with the greatest exposure to HELOCs (click on image to enlarge).
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