As home prices rise and the economy recovers, fewer borrowers are falling behind on their mortgages, or at least on their primary mortgages.
During the housing boom, millions of Americans took advantage of equity gains by pulling money out of their homes through home equity lines of credit (HELOCs). These were largely interest-only loans for 10 years, but that decade is now up for some and coming up for many more. Now, as these loans enter their so-called amortization period—the time when borrowers must start paying down the principal—a growing number can't.
"In the aggregate, the home equity market is experiencing lower delinquencies," said Herb Blecher of Lender Processing Services. "However, among the HELOC population that has already begun amortizing, we are actually seeing an increase in new seriously delinquent loans."
Year to date, new problem loan rates—seriously delinquent loans that had been current six months ago—on those that have already begun amortizing are up 11 percent, as opposed to down 33 percent for those that have yet to begin amortizing. Nearly half of all outstanding HELOCs, which are a type of second mortgage, were originated between 2004 and 2006, according to LPS. Most of them had 10-year "draw periods," the time when borrowers could use that line of credit and take cash out of their homes.
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Some borrowers may have the option of refinancing the HELOCs, but interest rates are now rising, making that prospect more difficult. Some lenders may reset the draw period for borrowers with good payment histories and good credit, since the bank will want to keep them as customers.
"For others who have not paid on time or may no longer have the equity to support the higher amortized payment, this is going to be an issue," said Craig Strent of Maryland-based Apex Home Loans. "I believe banks may start to look at some form of case-by-case modification, much of which might be extending the interest-only payment out a little further."
Strent sees this as a refinance opportunity, if the borrower can qualify. One option is to roll the HELOC into a new primary, fixed-rate mortgage or into an adjustable rate mortgage.
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