The nation could very well be in the fast lane to yet another housing crisis as home-equity loans are coming back to haunt both borrowers and banks.
The cost of home equity lines of credit, or Helocs, taken out before the last housing crisis is rising, The Wall Street Journal explains, and that is leading to a rise in delinquencies at banks and a possible financial doomsday scenario in the not-too-distant future as a key reset on the loans looms.
More homeowners are missing payments on Helocs, a kind of loan that allows borrowers to withdraw cash from their house. These loans commonly require interest-only payments for the first 10 years, but then principal payments kick in for the next 15 or 20 years, WSJ.com explained.
Roughly 840,000 Helocs taken out in 2006 are resetting this year, with principal payments on an additional nearly one million loans expected to hit in 2017, the Journal reported.
Borrowers who signed up for Helocs in early 2006 were at least 30 days late on $2.8 billion of balances four months after principal payments kicked in this year, according to Equifax. That represents 4.4% of the balances on outstanding 2006 Helocs. Delinquencies were at 2.9% before the reset.
“Resets can lead to payments jumping by hundreds, or in some cases thousands, of dollars a month. Consider a Heloc with a $100,000 balance and a 4.5% interest rate. It would have a $376 interest-only monthly payment, which would then rise to $632 when principal payments kick in, assuming a 20-year repayment period,” the Journal explained.
But the Heloc delinquencies are unlikely to trigger broader banking problems, the Journal explained. “It is generally harder to foreclose on a home, for example, 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.”
Helocs were ignored during the peak of the financial crisis. Most banks focused on addressing defaults on primary mortgages. “Home-equity loans got pushed on the back burner. We’re being forced to deal more with that now,” Guy Cecala, publisher of Inside Mortgage Finance, told the Journal.
The Office of the Comptroller of the Currency has been pushing banks to modify Helocs for borrowers who have trouble keeping up with payments, in an attempt to avoid another wave of home-related defaults. The changes include extending repayment periods and lowering rates to reduce payments, the Journal reported.
But the dire situation only proves that many Americans are literally drowning in debt, or at best, barely able to keep their heads above financial water.
A recent survey conducted by the Federal Reserve Bank of New York found that 15 percent of American households have either zero or negative net wealth, potentially affecting their ability to save for major purchases and restricting their access to credit, Bloomberg News reported.
The results, published on the New York Fed’s website, showed the rise in student-loan debt burdens is a significant factor for those households. Homeowners also are still struggling with negative equity a decade after the housing bubble burst, Bloomberg reported.
“Overall some 7 percent of home-owning households in our survey report being underwater on their mortgage,” the report’s authors Olivier Armantier, Luis Armona, Giacomo De Giorgi, and Wilbert van der Klaauw said in a blog post.
(Newsmax Wires contributed to this report).
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