Borrowers who opened home-equity lines of credit at the height of the housing bubble should brace for stiff increases in their monthly payments.
Helocs, as they’re known, were aggressively marketed from 2004 to 2007, and now the bills are coming due. These equity lines typically have a 10-year period during which the borrower can use the line of credit and pay only interest. At the end of 10 years, the borrower must begin paying both interest and principal on the outstanding balance, which could add up to hundreds of dollars more a month.
The bulk of the resets are expected from 2015 to 2017, but about $30 billion in outstanding Helocs will reach the end of the interest-only period this year, according to the Office of the Comptroller of the Currency, which regulates banks. Balances due to reset will rise to an estimated $52 billion in 2015, $62 billion in 2016, and $68 billion in 2017.
A recent report from Moody’s Investors Service offered an example of the coming payment shock for borrowers: A homeowner with a $40,000 Heloc balance and a $210,000 mortgage at 4 percent will see a monthly increase of nearly $300 — to $1,389 from $1,103 — when the equity line converts into a 10-year amortizing loan, assuming an interest rate of 3 percent.
The shock will be even worse for borrowers with equity lines that require balloon payments after the interest-only period; they will owe the balance in full.
Fearing another wave of delinquencies, the comptroller’s office is prodding lenders to assess their level of Heloc risk and be proactive about reaching out to these borrowers.
Homeowners with equity lines nearing the end of their interest-only period shouldn’t wait around in the meantime. “Borrowers should raise their hand very early and expect to be helped,” said Allen J. Jones, a managing director of RiskSpan, a mortgage consulting firm in Washington.
First, Mr. Jones said, they should review the terms of their equity line. “Know what you owe,” he said. “If you have any questions, call the servicer. Ask them to tell you exactly when your payment is going to change.”
Then, if you have doubts about your ability to make the new payment, find out what your options are. Do you have enough equity in your home to refinance out of the Heloc? If not, Mr. Jones suggests asking for a forbearance plan. “Just like with loan modifications, there can be a modification to a Heloc,” he said. “All lenders will look at this differently from the perspective of the borrower’s situation, but it starts with the borrower understanding where they are.”
A number of unknowns make it hard to predict whether the coming Heloc bulge will be a drag on the housing market, said Jeffrey C. Taylor, the managing partner of Digital Risk, which provides mortgage services and risk analytics to lenders. For one, it’s uncertain how many Heloc holders already defaulted on their loans and are out of the system. It is also unclear to what extent lenders are trying to get ahead of the problem. And are borrowers financially prepared for the resets?
“Do they realize they have a situation where their payments could triple?” Mr. Taylor said. “Are we going to see people having challenges making those payments? As 2014 plays out, we’re going to start to hear more about all of this.”
Bank of America, Wells Fargo and JPMorgan Chase hold the bulk of the Helocs, the Moody’s report said. But 15 regional banks are seen as having greater exposure because of their high concentration of Helocs relative to their assets. At the top of the list are TCF Financial, American Savings Bank, First Horizon National and RBS Citizens Financial.
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