Financial analysts are warning that banks face higher delinquencies and incremental losses on home equity lines because borrowers with HELOC loans taken out in 2004 – 2005 will start resetting after 10 years and the borrowers have to start paying both interest and principal rather than interest only payments which is compounded by the fact that many of these home loans are still underwater and cannot be easily refinanced.
The top 19 banks held $352 billion in HELOCs at the end of the third quarter, according to reliable sources. The vast majority are held by the three largest banks. Bank of America has the largest overall exposure to HELOCs at $83 billion, followed by Wells Fargo, with $80 billion, and JPMorgan Chase with $70 billion. However, regional banks such as TCF Financial, American Savings Bank, First Horizon National, RBS Citizens Financial, a unit of Royal Bank of Scotland, and First Citizens have a large quantity of these loans as well.
Many of the HELOCs were originated at the height of the housing boom between 2005 and 2007 when credit-underwriting standards were more lax than they are now. At that time, many borrowers used HELOCs to fund the purchase of a larger house that they otherwise could not afford, or to finance consumption. Lenders were not required at that time to evaluate borrowers for their ability to repay the lines, which are normally secured by a second lien on the borrower’s home, at the fully amortized rate.
The Office of the Comptroller of the Currency, is urging banks it regulates to proactively reach out to borrowers and restructure/ modify home equity lines when their draw periods come to an end.
The OCC estimates that 60% of all HELOC balances will start amortizing between 2014 and 2017, resetting to higher payments that could cause a jump in delinquencies and a new round of potential credit losses for banks. Roughly $29 billion in HELOCs will recast this year. The numbers ramp up to $52 billion next year, $62 billion in 2016 and peak at $68 billion in 2017, the OCC says.
Because borrowers face a potential payment shock of 30% or more, most banks are actively reaching out to refinance borrowers into a new product or extend existing terms.
Bank of America has warned that HELOCs that have already started to amortize this year have experienced a higher percentage of early-stage delinquencies and defaults when compared to its HELOC portfolio as a whole. Roughly 4% of B of A’s HELOCs were delinquent at the end of the third quarter. Of the $2.3 billion that had reset to higher payments, 3% were 30 days or more delinquent and 9% were nonperforming.
B of A also disclosed that 63% of home equity borrowers did not pay any principal on their HELOCs. Meanwhile, Wells Fargo has disclosed that 45% of its HELOC borrowers paid only the minimum amount due. Roughly 2.5% of Wells’ HELOCs were delinquent at the end of the third quarter.
Wells has created a program “to inform, educate and help borrowers transition from interest-only to fully-amortizing payments or full repayment,” the San Francisco-based company said in a third quarter filing.
Borrowers face the risk of rising interest rates because most HELOCs are adjustable and interest rates have been so low for so long. Some borrowers also may be unable to refinance if the value of their home is lower than when the HELOC was originated, though rising home prices have somewhat offset this concern.
If you have a HELOC that is going to reset be proactive, contact your servicer and see what your options are sooner rather than later as interest rates are currently rising. Loan modifications are occurring but still take a lengthy time to complete and not all home owners qualify. A short sale may be a better option if your property is still severely underwater.