Approximately 1.5 million homeowners have home equity lines of credit or HELOCs whose interest-only draw periods will end this year. The payments on these lines of credit will revert to fully amortizing and could double, according to Black Knight Financial Services.
The Last of Pre-Crisis HELOCs
Per BKFS’s latest Mortgage Monitor, which used data as of the end of March 2017, HELOCs facing reset this year represent 19% of active HELOCs. “This is the largest share of active HELOCs facing reset of any single year on record, although the approximate 1.5 million borrowers slated to see their HELOC payments increase this year is about 100,000 fewer borrowers than in 2016,” said Ben Graboske, EVP Data & Analytics at Black Knight in a public statement.
“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. After the deceleration in early 2018, we will have a lull of several years in reset activity,” Mr. Graboske explained.
Payment Shock, Delinquency Rate
When a HELOC’s draw period ends, in this case a 10-year period with interest-only payments, the monthly payments will become fully amortizing to cover both the principal and interest portions of the loan. This causes the payment to reset or go higher.
The HELOCs that will reset this year carry a total of outstanding unpaid principal balances of a little under $100 billion, according to BKFS. There is an average unpaid principal balance of $62,500 in every HELOC.
And borrowers of such HELOCs will see an increase in their monthly payments of $250, twice than what they are currently paying.
Payment increases that accompany resets also have an impact on the home equity line of credit’s performance. For example, the delinquency on 2006 HELOCs that reset in 2016 shoot up to 74%. But this figure is relatively low compared to the delinquency rates on 2004 HELOCS that reset in 2014 with 90% and 2005 HELOCs that reset in 2015 with 88%.
These payment shocks will continue to soar for HELOCs that will reset next year but will slow down once all HELOCs have reset in 2019.
Of Refinance Struggle and Rate Fluctuations
In the face of higher payments, a refinance is one method to lower them. But little to no equity can be a hurdle to refinancing.
This is the scenario facing one out of five borrowers with HELOCs whose equity is less than 10%. And one out of 10 such borrowers is underwater on his/her mortgage. This is however a decline from last year’s 31% of borrowers whose home equity lines of credit reset last year.
Moreover, mortgage rates play a role in refinancing. And the recent declines in the mortgage rates, with 30-year rates dropping below 4%, have caused the pool of borrowers who are refinanceable to grow to 4.1 million. By refinanceable, these borrowers “could both likely qualify for and have an interest rate incentive to refinance” per BKFS.
This represents an increase of 46% from middle of March and is the highest level it reached so far in 2017. Still, the population of these refinanceable borrowers takes up less than half of October 2016’s size when rates were under 3.5%, said BKFS.
“Such fluctuations in rates and their impact on refinance candidates will likely to continue to result in volatility in both refinance originations and correspondingly to prepayment activity, “ Mr. Grasboske pointed out.