American Banker published an article highlighting the risks banks face in their home equity line of credit (HELOC) portfolios. Many of these revolving loans were written in the go-go days just before the sub-prime crisis hit in 2006, and their 10 year “interest only” teaser rates are about to expire and convert to full principal and interest obligations.
Can you say “payment shock”?
The OCC can, and they are urging the banks under their supervision to reach their HELOC customers and work something out before their loans reset. That might be a refinance, an extension of the interest only payment period, or even a principle reduction – in the eyes of the OCC, any of these is better than what they fear might be double-digit default rates and the negative impact that would have on the soundness of the bank.
While the article points out that some banks have already taken the initiative and begun communicating with their borrowers about these options, others may be holding back due to the expense of such campaigns.
That’s a valid concern, in as much as these laggards might not be aware of the ability of automated communications platforms such as Nuance Outbound (formerly Varolii Interact) to dramatically reduce the cost of both the initial outreach and the subsequent, multiple customer contacts required to consummate a new deal.
For much less than the cost of a postage stamp, a bank can use automated communications to notify borrowers of the impending payment reset on their HELOC, offer alternatives, qualify interest and get the process started, all without involving a loan officer in the conversation. Once the workout is underway, the same methods can be used to keep the borrower informed of their status, request any additional documentation required by the underwriters and even schedule an appointment for closing.
The top mortgage servicers are already lowering their cost per loan by using automated communications when working with borrowers to modify their first mortgages. The same approach should be applied to HELOCs – this time before the crisis.