More than half, 56 percent, of the 3.3 million Home Equity Lines of Credit scheduled to reset over the next four years with fully amortizing monthly payments replacing interest-only payments are on properties that are seriously underwater, according to a new report from RealtyTrac.
With no equity remaining in the Bubble-era HRLOCs, the risk is high that the resets will trigger widespread foreclosures as owners struggle to meet the higher monthly payments.
A total of 3,262,036 HELOCs with an estimated total balance of $158 billion that originated during the housing price bubble between 2005 and 2008 are still open and scheduled to reset between 2015 and 2018. Of these, 1,834,588 (56 percent) are on residential properties that are seriously underwater, meaning the combined loan to value ratio of all outstanding loans secured by the property is 125 percent or higher.
“Homes purchased or refinanced near the peak of the housing bubble between 2005 and 2008 are much more likely to still be underwater despite the strong recovery in home prices over the last three years,” said Daren Blomquist, vice president at RealtyTrac. “Furthermore, many homeowners with HELOCs who have positive equity likely already refinanced to mitigate the payment shock from a resetting HELOC — an option not readily available for homeowners still underwater.
“While these underwater homeowners experiencing payment shock from resetting HELOCs are at higher risk for default, the good news is that we’ve already seen a large wave of more than 700,000 resetting HELOCs in 2014 without a corresponding wave of defaults,” Blomquist noted. “The bad news is that a much lower 40 percent of those 2014 HELOC resets were on seriously underwater homes. We are entering a period of higher risk over the next four years when it comes to resetting bubble-era HELOCs — especially given slowing home price appreciation that offers underwater homeowners less hope of recovering their equity in the short term.”
States with most HELOC resets are California, Florida, Illinois, Texas and New Jersey
With 645,872 HELOCs scheduled to reset over the next four years, California led the way among the states in terms of sheer volume of resetting HELOCs. A total of 423,706 (66 percent) of those resetting HELOCs in California are on homes still seriously underwater, and the average monthly payment increase on HELOCs resetting in California over the next four years is $215.
Florida had the second highest number among all states of resetting HELOCs over the next four years, with 513,229, followed by Illinois with 158,199. In both Florida and Illinois, seriously underwater homes backed 71 percent of the resetting HELOCs over the next four years.
Texas had the fourth highest number of resetting HELOCs with 158,017 over the next four years — 36 percent of which were on seriously underwater homes, and New Jersey had the fifth highest number of resetting HELOCs with 145,312 over the next four years — 47 percent of which were on seriously underwater homes.
Other states among the top 10 for resetting HELOCs over the next four years were Ohio (136,327), New York (132,492), Arizona (122,749), Pennsylvania (110,493), and Washington (110,372).
HELOC resets on highest percentage of underwater homes in Nevada, Arizona, Florida
Nevada had the highest percentage of HELOC resets over the next four years on homes that are still seriously underwater, 84 percent, followed by Arizona with 74 percent of HELOC resets on seriously underwater homes.
In both Florida and Illinois 71 percent of the homes with resetting HELOCs in the next four years are still seriously underwater, the third and fourth highest share among the states.
Other states among the top 10 for share of resetting HELOCs on seriously underwater homes were Utah (66 percent), California (66 percent), Maryland (65 percent), Washington (60 percent), New Mexico (58 percent), and Ohio (56 percent).