Home Equity Loans coming to around for repayment? What impact can we expect on our housing market when these loans reset? Are we back to square one?
Payment shock among holders of home equity lines of credit (HELOCs) is a growing concern as 2.5 million HELOCs are scheduled to reset over the next three years, according to the latest Mortgage Monitor Report from Black Knight Financial Services.
In fact, the average HELOC holder faces a monthly payment increase of $250 sometime in the next three years as he or she reaches the end-of-draw period and has to begin making principal and interest payments on his or her HELOC loan, according to Black Knight Financial Services' data.
Furthermore, the analysts at Black Knight Financial Services point out, the average HELOC borrower is currently using a little less than 60 percent of his or her available credit, leaving open the possibility of borrowing more before his or her HELOC resets.
"Further draws on these lines—for those that have not been locked—could result in 'payment shock' after they are reset that is even higher than the national average of $250 per month," said Kostya Gradushy, manager of research and analytics at Black Knight Financial Services.
Looking ahead, things don't get much better, according to Black Knight Financial Services. Beyond the next three years, Black Knight Financial Services predicts still-high payment increases as the next phase of HELOCs resets. Borrowers with HELOCs scheduled to reset in 2019 are using an average of about 40 percent of their available credit and will incur payment increases of about $200 per month based on their current rates.
"Should their drawing pattern match that of older vintages, we could be looking at a significantly higher risk of 'payment shock' for this segment," Gradushy said.
TransUnion expressed similar concerns recently, stating default risk for about $79 billion in HELOCs may grow over the next few years. Those with equity in their homes will be best able to absorb any "payment shock," according to TransUnion, as they may have the options to refinance their loans or sell their homes.
Meanwhile, borrowers are flocking to HELOCs with increasing magnitude. Originations of HELOCs are up 18 percent over the year at the national level and as much as 74 percent in one state.
Nevada, Michigan, Rhode Island, and Florida charted the greatest increases in HELOC loan originations—at least 50 percent in each state—while a few states have demonstrated sizable declines in HELOC originations. Mississippi, Nebraska, Wyoming, Iowa, and North Dakota have all experienced declines of at least 27 percent this year, according to the Mortgage Monitor.
Overall, mortgage loan originations for the month of June totaled 466,000, down 3.6 percent over the month and 40 percent over the year.
Refinances made up 32 percent of originations in July, according to the Mortgage Monitor.