HELOC Conversion to Amortized Loans Creating New Wave Of Defaults
Many Home Equity Lines of Credit, or HELOCs, issued before the mortgage industry crash, were structured so that interest only were the required minimum payments for the first ten years, then becoming fully amortized (principal plus interest) for the next 15 to 20 years of the loan, depending on the issuers’ programs in use at the time. Borrowers could pay more than that, but given that many borrowers were struggling to cover both the first mortgage and the minimum HELOC payment, many paid only the minimum. Those lines of credit issued in 2006, are just now becoming fully amortized home equity loans. According to the Wall Street Journal, roughly 840,000 HELOCS taken out in 2006 are resetting to fully amortized loans this year. Principal payments on an additional nearly one million loans are expected to hit in 2017.
With the higher payments, sometimes hundreds of dollars higher, homeowners who hung on during the mortgage industry crash are now creating a new rash of defaults on their HELOCs. It is one more reminder of how all-encompassing the Financial Crisis was, that it still is hanging over us today, ten years later.
Resolving this new wave of mortgage defaults will be a little trickier than the primary mortgage defaults. Today, many homeowners, when asked, still report being underwater on their homes. That means that foreclosure will be unlikely to cover the amount owed on the second mortgage, even before the foreclosure costs are added into the mix. Generally, HELOC balances are smaller than first mortgages, averaging less than $60,000 for those resetting this year. That means the losses will be smaller, and possibly less crucial for the government to step in as it did in 2006 and 2008. While the Making Home Affordable program did offer assistance for second mortgages, it still required that borrowers’ HELOCs be modified into fully amortized Home Equity Loans, which meant an increase in monthly payments. Given the lack of payment relief for the borrower, little was done to address HELOCs. Today, lenders will be forced to pay attention to the borrowers in this group, as delinquencies climb again.
Will this create a new crisis? Possibly not, due to smaller numbers of this type of credit issued, and due to the smaller amount of the lent money. On the other hand, can banks, already facing multiple financial challenges for mishandling of the paperwork, handle the new losses and needs of HELOC resolution?
Think your lender is mishandling your request for assistance? It still happens. Contact us today to find out how being represented by an attorney can boost your results!
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