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Millions of HELOCs To Reset: Are Borrowers Prepared?

- Thursday, September 25, 2014

One pressure point coming to light in the up-and-down housing recovery is the reset awaiting millions of Home Equity Line of Credits taken out during the housing boom of the mid 2000s. A big shift is set to occur – and the question keeping analysts guessing is the impact it will have on millions of homeowners and the economy overall.

Black Knight Financial estimates that at least 2.5 million borrowers will face HELOC resets over the next three years.  At issue, increased monthly payments that may “shock” unprepared borrowers, to quote TransUnion.

Millions of HELOCs To Reset to Larger Payments

During the bubble years, HELOCs were especially popular, based on their low monthly payment, and the high home values. Some banks even offered HELOCs where the available credit increased automatically as the equity in the house rose along with the home's value. HELOC payments start low since the typical structure only requires that the homeowner make the interest-only payments for the first ten years of the loan. Then, after ten years the loan matures and fully amortized payments are due in order to begin paying off the loan over time.

Translation, the new “reset” payments can be several times larger than the interest-only payments. The average increase in payments is estimated at $250 per month; potentially causing the homeowner a hardship when faced with paying the higher second mortgage payments. Their budgets are used to one thing – and soon they’ll be facing another. 

Are borrowers prepared? 

Under Consumer Financial Protection Bureau rules, servicers must notify borrowers of a reset 120 days in advance. This notice must include contact information for borrowers to contact housing counselors for advice and assistance. 

Using history as a guide, contacting homeowners is not easy. In fact, there are over a billion reasons for concern. Why? Over a billion dollars in mortgage settlement reparation checks were sent but never cashed. Communication will not be enough. 

Compounding the issue, the majority of HELOC owners have additional loans and credit to manage and little discretionary income to work with. The reality is that poor and middle-income homeowners face challenges even without adjusting to higher payments.   

Unless lenders pro-actively write down the balances, there will absolutely be a portion of the borrowers forced into default. No one knows how many, but according to TransUnion, as much as $79 billion of those outstanding HELOC balances could be at elevated risk of default in the next few years. These defaults will create foreclosures– an inevitable conclusion to a big ticket. 

“These resets are a very serious issue.” said Amy Crews Cutis, chief economist at Equifax. “It’s a nontrivial number of people who will get smacked with a higher payment.” 

The HELOC borrowing boom that enabled spending during the last decade is now set to impede our economic recovery, stalling spending, causing defaults and ultimately leading to more foreclosures; a dynamic certainly to take a bite out of the housing market. 

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