At least 2.5 million home equity lines of credit (HELOCs) will reset over the next three years, increasing borrowers’ monthly payments by an average of $250 per month and resulting in a surge of defaults, according to Black Knight Services’ September Mortgage Monitor report.
According to Kostya Gradushy, Black Knight’s manager of Research and Analytics, this average is based on current HELOC balances. Depending upon borrower behavior between now and time of reset, payment increases could change.
“Black Knight’s analysis of outstanding HELOCs that have yet to reset – some 2.5 million between 2015 and 2017 – is based upon current utilization ratios,” said Gradushy. “Currently, borrowers whose HELOCs will reset over the next three years are utilizing just under 60 percent of their available credit. Further draws on these lines – for those that have not been locked – could result in ‘payment shock’ after they are reset that is even higher than the national average of $250 per month. Looking further down the road, HELOCs not likely to reset until 2019 are exhibiting even lower utilization ratios – about 40 percent of available credit. Upon reset, those borrowers are currently facing average monthly increases of $200. Should their drawing pattern match that of older vintages, we could be looking at a significantly higher risk of ‘payment shock’ for this segment.
“We also looked at current levels of banks’ home retention activity and, while the volume of modifications, trial modifications and payment plans has declined along with delinquencies and foreclosures, we found retention activity is still high relative to current levels of distressed loan inventory. On a state-by-state basis, home retention activity does not always correlate with the amount of distressed inventory. Such activity is much higher, for example, in California – where nearly 12 percent of distressed loans were the focus of some form of retention efforts – than in any of the other states in the top five ranked by distressed inventory. In contrast, in the other four states in the top five (Fla., N.Y., N.J. and Ill.) just over six percent of loans on average saw home retention actions.”
In July. Federal regulators began warning banks that home equity lines of credit taken during the housing bubble coming due in the next several years could cause a surge of defaulters. The regulators are pressing banks to be proactive in helping clients avoid defaults, or banks may risk losing hundreds of billions of dollars.
More than $221 billion HELOCs at the nation’s largest banks are reaching the 10-year mark within the next four years. At that point, borrowers must start paying down the principal loan as well as the interest. The number of borrowers who miss payments can double in the eleventh year, according to data from Equifax, a consumer credit agency. So federal regulators are urging banks to help borrowers before it’s too late.