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Late Payments Rise on U.S. Home Equity Credit Lines

Late payments on U.S. home equity lines of credit rose to a 5-1/2 year high in the second quarter of 2007 but delinquencies on many other types of consumer loans fell, the American Bankers Association said Wednesday.

In its quarterly report on consumer borrowing, the bankers group said delinquencies in repaying home equity lines of credit rose to 0.77 percent in the April-June period.

That compared to a rate of 0.60 percent in the first quarter and represented the highest rate since the fourth quarter of 2001 when the rate was 0.81 percent.

However, the rate of closed-end home equity loan delinquencies fell in the latest quarter to 1.99 percent from 2.15 percent earlier in the year, the group said.

Closed-end home equity loans consist of a fixed amount with a fixed rate while borrowers using home equity lines of credit have a capped limit and are usually subject to adjustable interest rates.

When it came to paying credit card bills in the second quarter, consumers improved, according to the report. The delinquency rate on credit card bills fell to 4.39 percent from 4.41 percent in the first quarter, the bankers group said.

"Not surprisingly, customers may feel helpless when faced with a mortgage reset they can't afford, but they still want to keep up with other payments," said James Chessen, chief economist at the American Bankers Association. "People need to pay for gas and their cars so that they can get to work."

Worldwide credit markets have been shaken in recent months by a sharp rise in U.S. home mortgage delinquencies involving subprime, or less credit-worthy, borrowers. In some cases, subprime loans made a year or more ago are resetting at significantly higher interest rates than consumers realized.

The bankers association's survey of more than 300 banks nationwide was conducted before the Federal Reserve's recent cuts in key interest rates.

The group said its composite ABA delinquency rate, which tracks eight loan areas, dropped to 2.27 percent in the second quarter after rising to 2.42 in the first quarter to the highest level since the 2001 recession.

Late payments on property improvement loans fell to 1.46 percent from 1.61 percent and personal loan delinquencies dipped to 2.05 percent from 2.08 percent, the group said.

Increases in late payments on other consumer credit products included indirect auto loans, which rose to 2.77 percent from 2.73 percent, and direct auto loans which increased slightly to 1.69 percent from 1.68 percent.

Chessen said borrowers with an adjustable rate mortgage should carefully review the terms of the resetting rates and contact their lenders immediately to discuss options.

"Lenders are willing to work with borrowers during periods of financial stress, but ignoring the problem only makes the situation worse," Chessen said.

Many consumer loans are bundled into "asset-backed" securities, and sold to investors including institutions, pension funds and mutual funds. Further economic slowing might drive late payments higher, hurting the value of these securities.