Millions of home equity lines of credit – often the second loans after the primary mortgage – that were popular between 2005 and 2008 are scheduled to reset to higher interest rates soon, which could put many borrowers at risk. Borrowers will no longer be allowed to draw funds from the credit lines and also will be required to start paying down the loan principal.
image credit: Lendingmemo
Additionally, a recent study by RealtyTrac found that more than half of the HELOCs that will soon face an interest rate reset are on properties that are seriously underwater, meaning borrowers owe more on their mortgages than their homes are worth. The majority of these resets are to occur from 2015 to 2018, reports CNBC News.
The states with the most HELOC resets are in California, Florida, Illinois, Texas, and New Jersey.
"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," says Daren Blomquist, vice president at RealtyTrac. "Furthermore, many home owners with HELOCs who have positive equity likely already refinanced to mitigate the payment shock from a resetting HELOC — an option not readily available for home owners still underwater."
The highest risk from the resetting of bubble-era HELOCs will be occurring over the next four years, "especially given slowing home price appreciation that offers underwater home owners less hope of recovering their equity in the short term," Blomquist adds.
Lenders are increasingly alarmed about the resets looming. A TransUnion study shows that up to $79 billion of HELOC balances could be at elevated risk of default in the next few years, according to Steve Chaouki, head of financial services at TransUnion.