Think back 10 years ago when many Americans used their homes as a personal ATM, borrowing at what then was a phenomenally low interest rate – in the 3 percent range. These Home Equity Lines of Credit (HELOCS) typically were interest only for the first 10 years and had provisions that would convert to amortizing mortgage loans following the decade-long interest-only period, assuming the borrower had not repaid the debt prior to that time. Not only would the payment go from interest only to principal and interest, but the interest rate would also reset at the market rate at that time for amortizing mortgages.
The following graph shows the literal skyrocketing of revolving home equity loans owned by commercial banks in the mid-2000s.
While the total dollar volume of HELOCS outstanding has declined since the burst of the housing bubble, homeowners using these loans in the past are facing a significant increase in their monthly payments. The day of reckoning for many holders of HELOCS is this year and the coming three years, according to an article in the Wall Street Journal. The Journal reports that an estimated 817,000 HELOC borrowers holding $23 billion of these loans face increases this year, (double the level of 2013). Then an estimated $50 billion per year for 2015-2017 is in the pipeline.
Equifax reports a doubling of defaults on HELOCS that have hit the end of the interest-only period. Now consider that HELOCS were more popular in those states with the greatest home appreciation rates in the mid-2000s (Arizona, California, Florida and Nevada), and you can see a significant drag in those economies and potentially housing markets as consumers face increased payment levels. The Journal reports for some a more than doubling of their monthly payment.
The potential impacts include:
- Increased default rates and possibly foreclosures on homeowners with a lack of equity to refinance their first and HELOC loans into one
- Potential increased lending losses by banks – just as banks have restored their balance sheets from the 2008-2009 recession
- A hit to the economy as these borrowers will have to redirect cash from current purchases to repayment of past borrowing
To read the entire Wall Street Journal article (for those of you having subscriptions) click http://online.wsj.com/articles/heloc-payment-jump-to-take-bite-out-of-consumer-spending-1401658878?cb=logged0.9256347871232533#
As Newton’s third law of motion states, “For every action there is an equal and opposite reaction.” Easy money a decade ago is looking pretty expensive today for many.