NO EASY WAY OUT
Banks have some options for reducing their losses. They can encourage borrowers to sign up for a workout program if they will not be able to make their payments. In some cases, they can change the terms of the lines of credit to allow borrowers to pay only interest on their loans for a longer period, or to take longer to repay principal.
A Bank of America spokesman said in a statement that the bank is reaching out to customers more than a year before they have to start repaying principal on their loans, to explain options for refinancing or modifying their loans.
But these measures will only help so much, said Crews Cutts.
"There's no easy out on this," she said.
Between the end of 2003 and the end of 2007, outstanding debt on banks' home equity lines of credit jumped by 77 percent, to $611.4 billion from $346.1 billion, according to FDIC data, and while not every loan requires borrowers to start repaying principal after ten years, most do. These loans were attractive to banks during the housing boom, in part because lenders thought they could rely on the collateral value of the home to keep rising.
"These are very profitable at the beginning. People will take out these lines and make the early payments that are due," said Anthony Sanders, a professor of real estate finance at George Mason University who used to be a mortgage bond analyst at Deutsche Bank.
But after 10 years, a consumer with a $30,000 home equity line of credit and an initial interest rate of 3.25 percent would see their required payment jumping to $293.16 from $81.25, analysts from Fitch Ratings calculate.
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That's why the loans are starting to look problematic: For home equity lines of credit made in 2003, missed payments have already started jumping.
Borrowers are delinquent on about 5.6 percent of loans made in 2003 that have hit their 10-year mark, Equifax data show, a figure that the agency estimates could rise to around 6 percent this year. That's a big jump from 2012, when delinquencies for loans from 2003 were closer to 3 percent.
This scenario will be increasingly common in the coming years: in 2014, borrowers on $29 billion of these loans at the biggest banks will see their monthly payment jump, followed by $53 billion in 2015, $66 billion in 2016, and $73 billion in 2017.
The Federal Reserve could start raising rates as soon as July 2015, interest-rate futures markets show, which would also lift borrowers' monthly payments. The rising payments that consumers face "is the single largest risk that impacts the home equity book in Citi Holdings," Citigroup finance chief John Gerspach said on an October 16 conference call with analysts.
A high percentage of home equity lines of credit went to people with bad credit to begin with — over 16 percent of the home equity loans made in 2006, for example, went to people with credit scores below 659, seen by many banks as the dividing line between prime and subprime. In 2001, about 12 percent of home equity borrowers were subprime.
Banks are still getting hit by other mortgage problems too, most notably on the legal front.JPMorgan Chase & Co last week agreed to a $13 billion settlement with the U.S. government over charges it overstated the quality of home loans it sold to investors.