About 56% of the 3.3 million home equity lines of credit (HELOCs) that are scheduled to reset over the next three years are on properties that are seriously underwater, a report from RealtyTrac finds.
That means mortgage servicers should probably start preparing for a potential onslaught of defaults.
The 3.3 million HELOCs that RealtyTrac analyzed for the report have an estimated total balance of about $158 billion and were originated between 2005 and 2008. Most are still open and scheduled to reset between 2015 and 2018.
By ‘seriously underwater,’ RealtyTrac means the combined loan-to-value (LTV) ratio of all outstanding loans secured by the property is 125% or higher.
‘Homes purchased or refinanced near the peak of the housing bubble between 2005 and 2008 are much more likely to still be underwater, despite the strong recovery in home prices over the last three years,’ explains Daren Blomquist, vice president at RealtyTrac, in a release. ‘Furthermore, many homeowners with HELOCs who have positive equity likely already refinanced to mitigate the payment shock from a resetting HELOC – an option not readily available for homeowners still underwater.’
The total estimated unpaid principal balance on the loans tied to homes that are seriously underwater is about $88 billion, RealtyTrac reports.
These homeowners will see their monthly payment rise by an average of $146 a month, according to the report.
States with the highest number of seriously underwater homes with HELOCs due to reset over the next three years include California (645,872), Florida (513,229), Illinois (158,199), Ohio (136,327), New York (132,492), Arizona (122,749), Pennsylvania (110,493) and Washington (110,372).
Whether or not a high percentage of these homeowners end up defaulting as a result of the resets is unknown. Many of these homeowners have been receiving frequent notices and alerts from their servicers informing them of the resets – and reminding them to reach out for help prior to the reset date in the event they won't be able to make the larger payments. For this reason, some experts feel that the number of defaults resulting from HELOC resets will be relatively low.
Blomquist points out that RealtyTrac has ‘already seen a large wave of more than 700,000 resetting HELOCs in 2014 without a corresponding wave of defaults.’
He points out, however, that only about 40% of the HELOC resets that occurred in 2014 were on seriously underwater homes.
‘We are entering a period of higher risk over the next four years when it comes to resetting bubble-era HELOCs – especially given slowing home price appreciation that offers underwater homeowners less hope of recovering their equity in the short term,’ Blomquist says.
For the report, RealtyTrac analyzed open HELOCs originated between 2005 and 2008 with the assumption that these loans will reset with fully amortizing monthly payments after a 10-year period of interest-only payments. RealtyTrac used average HELOC utilization rates from the New York Federal Reserve and the prime interest rate of 3.25% to calculate the outstanding balance of the loans and to calculate the interest-only and fully amortizing monthly payments.
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