Home Equity Line Resets May Be Looming Financial Disaster
"WASHINGTON — Could the real estate market be heading for a new financial storm? Maybe.
Some mortgage and credit experts worry that billions of dollars of home equity credit lines that were extended a decade ago during the housing boom could be heading for big trouble soon, creating a new wave of defaults for banks and homeowners.
That's because these credit lines, which are second mortgages with floating rates and flexible withdrawal terms, carry mandatory "resets" requiring borrowers to begin paying both principal and interest on their balances after 10 years. During the initial 10-year draw period, only interest payments are required.
But the difference between the interest-only and reset payments on these credit lines can be substantial — $500 to $600 or more per month in some cases. If borrowers cannot afford or choose not to make the fully amortizing payments that reduce the principal debt, the bank that owns the note can demand full payment and foreclose on the house if there is sufficient equity.
According to federal financial regulators, about $30 billion in home equity lines dating to 2004 are due for resets next year, $53 billion the following year and a staggering $111 billion in 2018. Amy Crews Cutts, chief economist for Equifax, one of the three national credit bureaus, calls this a looming "wave of disaster" because large numbers of borrowers will be unable to handle the higher payments. This will force banks to either foreclose, refinance the borrower or modify their loans.
But refinancings often will not be possible, Cutts says, because the homeowners won't qualify under the tougher mortgage rules taking effect in January, or the combined first and second mortgages may exceed the value of the house. Complicating matters further, interest rates are likely to rise from their current low levels as the Federal Reserve tapers its purchases of Treasury and mortgage-backed securities. Higher base rates would make the payment shocks even worse. ...."
Banks are helping homeowners refinance home-equity lines of credit.
"Regulators are pushing banks to help homeowners refinance a type of loan that was popular during the housing boom.
From 2004 to 2008, borrowers gorged on billions of dollars worth of home-equity lines of credit, known as Helocs. The loans typically allow homeowners to borrow against their home for the first 10 years. Most borrowers make little if any payments beyond interest during that time.
The balance must be paid off over the following 20 years, and that repayment period will soon begin for many borrowers. Between 2014 and 2018, $208 billion worth of Helocs will start coming due, compared with a total of $20 billion for 2012 and 2013, according to data from the Office of the Comptroller of the Currency, which oversees banks.
Defaults on Helocs jump when the repayment period begins, data from banks show. The problem could get worse if interest rates rise, because the loans generally have adjustable rates.
As a result, the OCC is pressing lenders to come up with plans to help homeowners who took out Heloc loans to refinance now, while interest rates remain low. That could include allowing borrowers to refinance their Heloc into a fixed-rate loan or to refinance their mortgage to include the Heloc balance."