The bill is coming due for numerous homeowners with a type of mortgage that has been widely popular in the run-up to the housing bust, producing a surge in delinquencies at banks. More homeowners are missing payments on their home-equity lines of credit, or Helocs, a kind of loan that allows borrowers to withdraw cash from their house to pay for renovations, college tuition or just about any expense. These loans typically require interest-only payments for the first 10 years, but then principal payments kick in for the following 15 or 20 years.
HELOCS Come Back to Haunt Borrowers and Banks
The increased cost of the financial loan can become a strain for some borrowers. This really is becoming an issue now because many borrowers signed up for Helocs in the run-up to the housing bust as home values kept rising. Roughly 840,000 Helocs obtained in 2006 are resetting this current year, with principal payments on an additional nearly one million loans anticipated to hit in 2017.
Borrowers who agreed to Helocs in early 2006 were at least 30 days late on $2.8 billion of balances 4 months after principal payments kicked during this year, reported by Equifax. That is representative of 4.4% of the balances on outstanding 2006 Helocs. Delinquencies were at 2.9% prior to the reset.
Resets can result in payments jumping by hundreds, or in some cases thousands, of dollars a month. Think about a Heloc with a $100,000 balance along with a 4.5% rate of interest. It will have a $376 interest-only payment per month, which will then rise to $632 when principal payments kick in, assuming a 20-year loan repayment period.
Large banks, including Bank of America Corp. , J.P. Morgan Chase & Co. and Citigroup Inc., reported higher Heloc delinquencies in the second quarter, based on securities filings this month. In contrast to most mortgages, Helocs are primarily held on banks’ books, meaning lenders usually are more exposed to losses when the loans don’t get repaid.
Worsening Heloc performance underscores that banks aren’t completely past all the problems sown in the run-up to the housing bust. While delinquencies on mortgages used to purchase or refinance homes have dropped substantially in recent years, Heloc delinquencies are rising and many large banks are warning of the risk of more in the future.
Despite this, banks are already ramping up new origination’s, extending the largest dollar amount of lines of credit in 2015 since 2007. This time around, the borrowers getting approved have high credit scores and at least 10% to 15% equity in their homes in most cases.
Some banks took additional steps to reduce risk. Wells Fargo & Co. and Bank of America no longer permit interest-only payments on new Helocs given to most borrowers.
While delinquencies for Helocs are rising, charge-offs also are up. Lenders wrote off 1.4% of defaulted balances from 2006 Helocs so far this year, up slightly from a year prior, as outlined by Equifax.
Heloc delinquencies are unlikely to spur broader banking problems. It is actually generally harder to foreclose on a home, one example is, if borrowers are paying their primary mortgage on time. Heloc balances, while rising, are small-averaging $55,400 for those resetting this year-compared with regular mortgages.
An improving real estate market may also help limit defaults. As home values rise, more borrowers have the equity to refinance their Heloc with a new one, effectively starting the interest-only period from the beginning. Or some borrowers would be able to roll both their first mortgage and Heloc right into a refinance mortgage.
Still, borrowers with a mortgage along with a Heloc are at greater risk of owing more on their home than it is it’s worth. Only 6% of homes with one mortgage are underwater, compared with 17% of homes with two mortgages, as outlined by mortgage-data firm CoreLogic Inc
As the majority of pre-crisis Helocs starts to reset, the dollar amount of unpaid balances is increasing at many banks.
Bank of America, the largest home-equity lender by volume, reported $250 million of Helocs which have transitioned to requiring principal payments were a minimum of Thirty days delinquent in the second quarter, up 56% from a year prior, according to company filings. The bank states that accounts for just 2% of Heloc balances which are in repayment.
At J.P. Morgan, $647 million of Helocs that reset were behind on payments in the second quarter, up 21% from a year prior, according to company filings. A spokeswoman said the bank gets in touch with borrowers before Helocs reset to help them get prepared for the change while offering modifications to eligible borrowers.
At Citigroup, delinquent balances totaled $338 million in the second quarter, up 105% from a year prior. The bank declined to comment.
Concerns around Heloc repayments were largely ignored during the peak of the economic crisis. Most banks focused on addressing defaults on primary mortgages-and most Helocs only required minimum payments then.
“Home-equity loans got pushed on the back burner-we’re being forced to deal more with that now,” said Guy Cecala, publisher of Inside Mortgage Finance.
The Office of the Comptroller of the Currency continues to be pushing banks to alter Helocs for borrowers who have trouble maintaining payments, in an attempt to avoid another wave of home-related defaults. Those modifications include extending repayment periods and lowering mortgage rates to reduce monthly required payments.
Another headwind for Helocs may also be on the way: Most Helocs have variable rates of interest that move in tandem with rates set by the Federal Reserve. A rising-rate environment would push up monthly loan payments further, a danger Citigroup warned of in a company filing this month.
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