Home Equity Lines of Credit- Resets Causing a Rise in Delinquencies at Banks

Annamaria Andriotis reported in today’s Wall Street Journal that, “The bill is coming due for many homeowners on a type of loan that was widely popular in the run-up to the housing bust, causing a rise in delinquencies at banks.

More homeowners are missing payments on their home-equity lines of credit, or Helocs, a type of loan that allows borrowers to withdraw cash from their house to pay for renovations, college tuition or almost any other expense. These loans typically require interest-only payments for the first 10 years, but then principal payments kick in for the next 15 or 20 years.

“The increased cost of the loan can become a strain for some borrowers. This is becoming an issue now because many borrowers signed up for Helocs in the run-up to the housing bust as home values kept rising. Roughly 840,000 Helocs taken out in 2006 are resetting this year, with principal payments on an additional nearly one million loans expected to hit in 2017.”

The Journal article noted that, “Borrowers who signed up for Helocs in early 2006 were at least 30 days late on $2.8 billion of balances four months after principal payments kicked in this year, according to Equifax. That represents 4.4% of the balances on outstanding 2006 Helocs. Delinquencies were at 2.9% before the reset.

Resets can lead to payments jumping by hundreds, or in some cases thousands, of dollars a month. Consider a Heloc with a $100,000 balance and a 4.5% interest rate. It would have a $376 interest-only monthly payment, which would then rise to $632 when principal payments kick in, assuming a 20-year repayment period.”

Today’s article added that, “Worsening Heloc performance underscores that banks aren’t completely past all the problems sown in the run-up to the housing bust. While delinquencies on mortgages used to purchase or refinance homes have dropped substantially in recent years, Heloc delinquencies are rising and some large banks are warning of the risk of more to come.”

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