This article, written by Rick Sharga, was originally published on Auction.com.
Between $170 and $200 billion of outstanding HELOCs (home equity lines of credit) are due to reset over the next four to five years. There are concerns that these resets will lead to another huge wave of foreclosures. I don’t think that’s going to happen, for a few reasons.
First, many of the “worst” of these loans have already gone bad, or been wiped out as part of the 6 million foreclosures we’ve seen over the past few years. Rising home prices over the past two years have likely put many borrowers back into a position of positive equity – at least enough that a lender might be able to consider rolling the HELOC into a refinanced mortgage at current market rates. And I think it’s highly unlikely that lenders will allow a large number of these loans to go under, just given the amount of regulatory and political pressure they’re under.
I expect that we’ll probably see a lot of “kicking the can down the road” programs to help borrowers avoid defaulting on these loans. Loan modifications that extend draw periods, reduce interest rates, or extend the terms of the loan to reduce monthly payments. Since home prices are projected to continue to rise (albeit more slowly) over the next few years, simply extending the terms of HELOCs may solve the problem for a multitude of borrowers.
That said, borrowers shouldn’t take anything for granted. Anyone who has a HELOC that’s due to reset over the next few years should get in touch with their banks now to make sure they understand what’s going to happen, and when. Will they owe the balance in a balloon payment on the reset date? Or will their payments go up by a few hundred dollars a month? If they can’t afford the higher payments, what sort of options might their lender be able to offer them? Better to get ahead of this situation, before it becomes a real problem. Banks will absolutely not want to foreclose on a HELOC and take on a property that’s underwater, and they also don’t want the CFPB jumping in with a regulatory “fix,” so they’re probably going to get very creative with modification programs.
If a borrower’s home value has appreciated enough, they may want to look at refinancing today, while rates are still low, rather than waiting for the HELOC to reset in a year or two, when interest rates are expected to be higher. Lenders are looking for qualified borrowers they can work with today, as loan volume (particularly refi volume) is plummeting.
If the loan isn’t going to reset for a couple of years, it might not be a bad idea to start paying down some of the principal balance now; even small monthly payments over a period of time can help reduce the “payment shock” that could happen when rates re-set. It’s worth talking to your lender to see how much lower monthly payments might be in the future if you can make some payments now.
We will see more HELOC defaults; not everyone will be able to find a solution that works. But even if HELOC defaults increase, foreclosure activity on mortgages will continue to decrease over the next few years, which should more than offset any HELOC problems from a housing market perspective.
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