Since 2014, people in the mortgage servicing industry have been trying to forecast whether there will be a surge of defaults on the many home equity lines of credit (HELOCs) that are scheduled to reset over the next year or so.
Well, it appears they will soon find out: According to Black Knight Financial Services’ Mortgage Monitor report for March, about 19% of active HELOCs are scheduled to reset this year, which, according to Ben Graboske, executive vice president for Black Knight Data & Analytics, “is the largest share of active HELOCs facing reset of any single year on record.”
The good news is that if the “HELOC default wave” doesn’t hit, then servicers will have essentially dodged a bullet.
The report shows that more than 1.5 million HELOCs will see interest-only draw periods end in 2017, with payments becoming fully amortizing.
“With the lines beginning to reset this year and early into 2018, we’re seeing the last of the pre-crisis-era HELOCs that the industry has been focusing on since early 2014,” Graboske says in a statement. “After deceleration in early 2018, we will have a lull of several years in reset activity.”
Still, it could be a bloodbath, especially if the economy turns downward: On average, borrowers facing resets this year are looking at a “payment shock’” of about $250 per month over their current HELOC payments – more than doubling their current payments, according to the report.
“Historically, those increases have impacted HELOC performance significantly; delinquency rates of 2006 vintage HELOCs – which reset last year – jumped by 74 percent,” Graboske says. “That was marginally lower than the 2004 and 2005 vintages, which saw delinquency rates rise by 90 percent and 88 percent, respectively. Payment shocks remain high for lines resetting in 2018 but then drop along with the overall volume of resets in 2019.”
As of the end of the first quarter, there was just under $100 billion in outstanding unpaid principal balances (UPB) on HELOCs facing resets in 2017, with an average $62,500 UPB per line of credit.
The report shows that one in five borrowers facing HELOC resets in 2017 have less than 10% equity in their homes, making refinancing problematic; this represents a decrease compared with 31% of borrowers facing resets last year.
“One thing that’s working in the 2007 vintage HELOCs’ favor has been the equity and interest rate environment of the last year,” Graboske says. “Rising home prices and low interest rates throughout 2016 have allowed borrowers to be much more proactive than in years past in terms of paying off or refinancing their lines to avoid increased monthly payments.
“For those still facing resets, however, equity continues to be a struggle,” he adds. “One third of borrowers who have HELOCs that will reset in 2017 have less than 20 percent equity in their home… One in five have less than 10 percent, and one in 10 are actually underwater. Even that reflects improvement in home prices, though; last year 45 percent of borrowers facing reset had less than 20 percent equity and nearly 20 percent were underwater.”