By: Lance T. Denha, Esq.
Over the last decade, many homeowners have likely enjoyed low, interest-only payments on their home equity lines of credit (“HELOC”). Unfortunately, many of these interest-only payments may be coming to an end since many of the HELOC’s will reset the lower rates the homeowners have enjoyed.
How does a HELOC work? Typically, instead of applying for a new loan each time expenses begin to pile up, many homeowners turn to HELOC’s, which give them quick access to cash, as needed, during a specified time period. In this instance, your house will have a second lien on your residence as a result of the HELOC.
Beginning this year, monthly payments could more than double for millions of homeowners due to the manner in which HELOC’S were prepared and presented to homeowners a decade ago. The vast majority of HELOC’s permitted borrowers to draw funds for a period of ten years and required only interest payments during that time. However, over the remaining duration of the HELOC term (typically 30 years), many homeowners have to begin paying principal and interest. This will be shocking to many consumers who have unlikely reviewed any prior loan documents.
According to Lender Processing Data, over half of outstanding HELOC’s were originated between 2004 and 2006. The draw periods, which is defined as the length of time borrowers have to access the money, can range widely- typically a period of 10 years or so during which the borrower can make withdrawals up to their credit limit.
Financial Regulators aware of the potential wave of defaults pending and have been urging the large banks to set aside extra reserves for possible future losses regarding HELOCs. Certain banks may be encouraging borrowers to apply for a loss mitigation workout program if they will not be able to make their payments. The banks may also choose to modify the HELOC by extending the amortization period.
Another program set up by the Treasury and then implemented by certain states for distressed homeowners is what’s known as the Hardest Hit Fund (“HHF”). The HHF were established by individual states in order to aid homeowners in those states hardest hit by the economic crisis. Since then, state housing agencies have used the fund to develop programs that stabilize local housing markets and help families avoid foreclosure. Under Treasury’s HHF program, states can use Tarp funds for modifying or extinguishing HELOCs and other second liens. Treasury allotted $60 million to five states to fund second lien programs. Of that, $20 million has already been spent on second-lien reductions.
The HHF can be used to potentially extinguish the HELOC. It differs by state, but will involve moneys from the HHF and potentially any lien holder. However it should be noted that borrowers cannot qualify if they cashed out 150% or more of the original value of the home. Banks may also look into simply charging off the loan if there is not enough equity in the property. However, this will not completely alleviate the borrower of liability. The banks will maintain its second lien position and if the property is ever sold the institution may get a recovery down the road. The banks may also choose to modify the HELOC by extending the amortization period.
If your bank is not one of the banks which are proactive in dealing with this potential crisis, it is highly advisable that you as the borrower communicate in advance directly with your lender to learn your options moving forward.
Unfortunately this is only the tip of the iceberg regarding HELOC issues. Resets on HELOCs are expected to accelerate this year and peak in 2017. Be prepared and consult with professionals and your lender to avoid further credit issues and foreclosure proceedings for failure to pay HELOCS.