Over 400,000 HELOC borrowers have had their lines reduced and HELOC lenders are more unpredictable than ever. What’s the reasoning behind this recent instability? HELOC lenders have lost more money on these loans than ever before. Although home equity lines make up a small percentage of the mortgage market, their loss hits banks harder because lenders tend to hold these loans themselves instead of selling them to secondary buyers.

The Associated Press reports:

“Dugan, whose agency oversees large national banks, said the size of the HELOC market is significantly less than that for mortgage loans, reducing banks’ overall exposure. The problem, however, is that banks usually keep the home equity loan on their own balance sheet, retaining all of the credit risk.

The loss rate for home equity loans has traditionally been about 20 basis points (0.20 percentage point), Dugan said, but that figure has climbed rapidly in recent quarters. The loss rate climbed to nearly 1 percent in the final three months of 2007, and hit 1.73 percent in the first quarter of this year.

In real dollar terms, losses on all home equity loans were $2.4 billion in the first three months of 2008, compared with $273 million in the first quarter of 2007.”

These huge losses explain a lot about bank behavior during the past few months. Clearly, reducing HELOC limits, freezing lines, and other tactics have been designed to help stem the tide of future losses.

See Also: List of Lenders Sending HELOC Freeze Letters

Tags | Heloc, heloc freeze, home equity loan, lenders