This group’s decision to default is based on cold logic. Now we have the next wave the strategic defaulters. The dollar amount of home equity loans affected by 10-year “resets” will be $29 billion in 2014, $53 billion in 2015, and will peak at $73 billion in 2017. While major hurricanes with the potential to cause severe economic damage and a wave of mortgage defaults is not a new phenomenon, climate change is. The next group was individuals with decent to good credit this group started to default because one or both members of the family lost their jobs, and therefore, they could no longer make payments on the mortgage.
During that period, outstanding debt on home equity lines jumped 77%, from $346 billion to over $600 billion. What is known is that billions of outstanding HELOCs will reset in the coming four years, a result of the mortgage lending boom between 20. The impact will depend on the percentage of loans that default, which analysts are struggling to forecast. With COVID-related income supplements and unemployment benefits now expired or reduced, we face a new wave of mortgage and rental delinquencies, many of which will come in the next few months. Just how bad home equity lines of credit will end up being for banks is yet to be seen. Cutts refinancing will often not be a viable option due to tougher mortgage rules taking effect in January, declines in home value, and rising interest rates. Some problem loans can be addressed through workouts or refinancing. Amy Crews Cutts, the chief economist at Equifax recently told mortgage bankers that the coming increases to homeowners’ monthly payments on these home equity lines is a pending “wave of disaster. Most lenders gave homeowners with quake damage a three-month break on mortgage payments, but that moratorium has expired, and banks are starting to serve default notices, so other borrowers are. The results for the 2002 wave (the second column in Table 2) show that. Because a HELOC is typically a second mortgage, foreclosure proceeds will go to the first mortgage and leave little if anything for the home equity lender. Default rates on mortgages and consumer loans increased dramatically over this. Particularly concerning to lenders is that they stand to lose 90 cents on the dollar when these loans go bad.
NEXT WAVE OF MORTGAGE DEFAULTS PROFESSIONAL
Data from consumer credit agency Equifax indicates that the number of HELOC borrowers missing payments can double in the eleventh year of the loans. Peck has 20-plus years’ experience covering the mortgage industry, he most recently served as Editor-in-Chief for The Mortgage Press and National Mortgage Professional Magazine.
The resets will almost certainly lead to an increase in default rates. Depending on the amount and terms of the loan, homeowners with resetting HELOCs could see their monthly payments rise by $200 to $600. That’s because many of these loans are hitting their 10-year anniversary, at which point borrowers typically must begin paying down principal in addition to the interest they had been paying from the start. Billions of dollars that were extended in home equity lines of credit (HELOC) during the housing boom a decade ago could soon become big problems for banks and homeowners.
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