A critical component to your risk assessment
One of the most critical components to your loan portfolio risk assessment is the ever challenging HELOC review. The challenges of successfully performing this review all lie in the fact that there are many moving parts and you may not have control or easy visibility into each of the parts. For instance, if there is a Senior lien and you are not the holder of the note, your visibility into the balance, payment history, delinquency, etc. is not both free and easy to obtain.
Managing the moving parts
How do you overcome the challenge of properly tracking and managing the data around the moving parts? Collateral values, Senior lien balances, the loan balance, delinquencies, credit scores, credit migration, credit limits, and credit utilization are all potentially changing in these loans at a rate that can be difficult to keep up with. If you are the holder of both a senior and junior loan it is likely that you do have access to most of the moving loan parts, but it is also probable that the data is not consolidated together to give you the analysis that you really need. It is likely that your 1st mortgage is in one loan portfolio management system and your HELOCs are in another. The combining and “marriage” of these loans can be quite cumbersome and labor intensive. So how do you solve the problem to do this efficiently?
Methods for success
The first step to having success in this area of loan risk analysis is to evaluate your current process for collecting and storing data. If you are creating gaps with your current operational processes, fix these gaps. Make sure that you are not just collecting, but also storing data on the loan that will allow you to evaluate it throughout its life; collateral addresses, original values, original credit limit, lien position, and senior balance at origination are a minimum.
Depending on what you have historically captured and retained on these loans will impact your methods of evaluation going forward. The first factor that you must know is the position of the loan, identify those HELOCs that are in 1st position and spot check to make sure that your method for identifying them as 1st position loans is effective. After you have segregated those that are in 1st position identify gaps that may exist on information around the senior lien. If you have the underwriting information on the senior lien (sr. balance at origination) then you have the ability to do a conservative estimate on the current risk of these loans. If you are missing information on the senior liens there are a few different options for obtaining this information; credit bureaus, other third parties, etc. that vary in cost and level of detail provided.
After you’ve identified the gaps in your data and decided on an action for filling them, you can now begin the analysis on those loans where you do have the required data. Step one is to combine balances and credit limits from 1st and second liens-you will definitely want both to identify current and potential exposure. Next, you will want to get an updated value for the property securing the loan–this too can be accomplished in different ways with different costs. Lastly, you will want to get updated credit scores for the borrowers on the loans, this will give you the ability to see the multi-dimensional loan portfolio analysis of LTV and credit scores. Now that you have all the data, you can successfully show LTV’s, LTV migrations, credit scores, and credit score migrations. The combinations of these elements will provide you quick visibility into risk and opportunity of your HELOC portfolio.
The data gathering and storage can obviously be resource intensive and pulling this together once or twice a year for a review makes it even more difficult. This is why we recommend fixing the gaps at the front end if the process and then building simple controls that are looked at monthly in your operational process. Constantly, looking at underwriting on these loans and movement of them within the portfolio over time will eliminate the once or twice a year overwhelming tasks. Once built and operational, the process for upkeep is simple, effective, and valuable to your institution for managing risk and for adhering to regulatory needs.