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U.S. regulators warn banks on home equity loan defaults

By Douwe Miedema

WASHINGTON, July 1 (Reuters) - U.S. regulators on Tuesday urged banks to work with clients to avoid defaults on hundreds of billions of dollars of home equity lines of credit taken out during the housing bubble that will come due in the next several years.

The regulators also pledged to thoroughly check banks' programs to control the risk arising from the lines of credit, or HELOCs.

"When borrowers experience financial difficulties, financial institutions and borrowers generally find it beneficial to work together to avoid unnecessary defaults," five regulators said in a joint statement.

When HELOCs go bad, banks can lose an eye-popping 90 cents on the dollar, because the line of credit is usually a second mortgage. If the bank forecloses, most of the proceeds of the sale pay off the main mortgage, leaving little for the home equity lender.

More than $221 billion of these loans at the largest banks will reach their 10-year anniversary over the next four years - or 40 percent of the HELOCs now outstanding - at which point borrowers usually must start paying down the principal loan as well as accrued interest.

The number of borrowers missing payments around the 10-year point can double in their eleventh year, data from consumer credit agency Equifax shows.

The agencies laid out how banks should oversee their HELOC portfolios nearing the benchmark, how to deal with clients unable to pay and how to report financials.

The agencies are the Office of the Comptroller of the Currency, the Federal Reserve, the Federal Deposit Insurance Corp, the National Credit Union Administration and the Conference of State Bank Supervisors.

If economic growth picks up, and home prices rise, borrowers may be able to refinance their main mortgage and their HELOC as a single new fixed-rate loan. But the OCC has been warning banks about the risk of these products since the spring of 2012, pressing them to minimize risk.

(Reporting by Douwe Miedema; Editing by Steve Orlofsky)