$265 Billion in Home Equity Lines of Credit (HELOCs) Will Enter the Repayment Period in the Next Few Years; 10 Million HELOCs in Default Will Be a Downward Drag on America's Housing Recovery for Years to Come
The $265 Billion Wave That's About to Crush Homeowners
June 4, 2015HELOC originations soared from 2005 up until the start of the housing crisis, and because many HELOCs enter the repayment phase after 10 years, these billions of dollars in outstanding credit balances are just now coming due. This wave of HELOC resets is expected to significantly stress borrowers' finances and the lending industry.
"This analysis is critical as we want to not only help lenders prepare and understand the payment stress of their borrowers, but also give consumers an opportunity to understand what the impact may be to their financial status and how to be better prepared for it," said Michele Raneri, Experian's vice president of analytics and business development, in a statement about the study.
"Instead of using it like a line of credit, borrowing and then repaying the loan to restore the home equity that had been tapped into, most people simply took the maximum amount in cash and never tried to pay down the outstanding amount for the entire 10-year period," said Charles Phelan, a debt-relief consultant who specializes in HELOC negotiation, in an email.
"In effect, most existing HELOCs are therefore like a huge credit card debt that has been at the maximum limit for years, with only interest expense being paid each month to keep the balance the same and not reduce it."How much your payment increases depends on many things, like the interest rate and the length of the repayment period — a shorter repayment period generally translates into a larger increase in payment. Some HELOCs have no repayment period and require a lump-sum repayment when the draw period ends.
The HELOCs that are coming due were opened in very different economic times, under the impression that home values would continue to rise. Because that didn't happen, borrowers may not be prepared to handle this significant change to their finances.
"A lucky few will be able to absorb the new high monthly payment without defaulting and thereby risking foreclosure, and some will have sufficient equity to obtain a traditional refinance to a new single mortgage," Phelan wrote. "For a majority of homeowners with HELOCs, however, options are limited due to real estate prices having dropped to the point where the most HELOCs are not covered by equity. This blocks people from refinancing to a single new mortgage at a more reasonable payment level."
"With more than 10 million of these contracts having been issued during 2005-2008, a tsunami of defaults is likely and will be a downward drag on America's housing recovery for years to come," Phelan wrote.
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