Foreclosures when boom-era HELOCs turn 10

[kent]

Another potentially freaking mess on the horizon.  As far as I'm concerned, HELOC's should not be an alternative used to augment or replace an ATM machine - you either have the money to buy that boat, MBZ, BMW, etc. or you don't.  Watched a neighbor accrue a Jag, MBZ convert and a Porsche convert - everything "looked" great until the ATM ran dry and they damn near lost the place and would have were it not for a buyer turning up at literally the last minute.

www.msn.com/en-us/money/realestate/brace-for-a-flood-of-foreclosures-when-boom-era-helocs-turn-10/ar-AAbDeGu

In part....

A RealtyTrac analysis of public property records across America found that at least 3.3 million homes still carry HELOCs from the 2005-08 era, with 1.8 million of these residences — or 56% of the total — considered "seriously underwater." Consumers who own those homes owe lenders at least 125% of a property's current market value.

RealtyTrac predicts that once the average HELOC borrower's ten-year interest-only period ends, the person's monthly bill will more than double to $279 from just $133 today.

That might not sound like much, but Blomquist thinks the higher charges will throw many struggling homeowners into foreclosure. "I think it's a significant shock that will push a lot of people over the edge," he says.

RealtyTrac expects the biggest problems in California, Florida and Illinois, which have not only high levels of boom-era HELOCs in general but lots of loans tied to seriously underwater homes.

For example, the firm found that some 646,000 California residences carry 2005-08 HELOCs, including 424,000 linked to properties whose owners are deeply in the red.

[justme]

Since I'm trying to buy a place in one of those states is it bad if I day bring it on? Lol

[Artemis Windsong]

Very scary.

[mollyanna58]

How many HELOC's were interest only?  I thought most were interest and principal, and when the term expired, you simply couldn't write any more checks on the account.

[haapai]

This article would have been a lot more meaningful if they had discussed the interest rates typically associated with HELOCs. 

[haapai]

There's absolutely no incentive in this interest rate environment to pay off an IO HELOC.  They are cheap and potentially tax deductible.  When I use goal-seek to figure out the terms of the "average" HELOC described in the article, I get a principal of $49,223 and an interest rate of 3.25%.  Would you make principal payments on that if you didn't have to?  The odds are good that your first mortgage has a higher interest rate. 

Things get much more interesting if interest rates rise, especially if the 20-year amortizing loans that result from the expiring IO HELOCs are adjustible.  Then we'll find out who has been swimming naked. 

[jkapp]

Apr 24, 2015 15:27:25 GMT -5 mollyanna58 said:

How many HELOC's were interest only?  I thought most were interest and principal, and when the term expired, you simply couldn't write any more checks on the account.

Home Equity Lines of Credit are normally interest only for the first ten years...Home Equity LOANS are interest and principal. Technically they are both loans, but lines of credit can be constantly dipped into and paid off for those ten years.  HE Loans are normally a one-time borrowing of money. 

[djAdvocate]

i don't expect much of a problem, here.  this is probably just another "killer bee" scare.

speaking for myself, i have one of these HELOCs.  i used it for tenant improvements on the place, and it still has a significant balance.  and yes, it is interest only, to answer another poster.

HOWEVER, our house qualified for a refi WITH the HELOC.  our interest rates is about 2% below what we were paying, and so paying an extra $100/month on the HELOC is no big deal.  but yes, it will have to start getting paid down, and SOME foreclosures will happen.

i bought at the VERY TOP OF THE MARKET.  at the BOTTOM, my home was down 50% in appraised value, and yet now it is back to where i bought it, maybe slightly above.  so, i am puzzled how someone could be "deeply in the red".  i would like to see/understand that.

[Angel!]

I have a 2007 heloc. Interest rate is 4.75 variable. Mine was taken out to refi the home equity loan used to buy the house a year earlier which had a horrendous rate.

Don't know if it was common, but mine was locked within 1-2 years because of the credit crisis, so since 2008 or 2009 (can't remember) I haven't been able to pull out money if I wanted to.

Mine has a 5 year repayment when the interest only ends in 2017. This will add around 200 to my payment, which I'm not really concerned about. But, I only have $13.5k on the loan. If you have out a $50k loan, that is likely ~$800 payment jump. Yikes on an underwater loan.

I'm not underwater though. I have close to $30k (20%) in equity now since values have finally recovered and my home is worth more than I bought it for - only $6k more, but that is still something.

I could see this being a problem for a select group with high loan amounts that are underwater still, so no opportunity to refi.

[Deleted]

Our housing prices are back to bubble (pre-bust) levels & I understand many areas are back up. What is the disaster if the homes are worth what they were leveraged for? People will sell them instead of letting banks foreclose.

[zibazinski]

If they can. If they've borrowed so much and have a mortgage as well, the house may not sell for what's owed on it.

[haapai]

It's entirely possible that the methodology that has been used to estimate the number of underwater and severely underwater homes is also flawed.  It's probably based on recent sales and tax assessments both of which are skewed in a manner that will make large numbers of houses look way underwater.  Both of those data sets tend to ignore the condition of the house in question and assume that the seller of the house was under the normal amount of pressure to sell. 

In my neighborhood, well-maintained owner-occupied houses appear to be selling for 50-100% more than REOs of similar age and square footage.  A whole lot of less-mobile-now folks are really happy to learn this. 

[mollyanna58]

Apr 25, 2015 8:04:38 GMT -5 jkapp said:

Apr 24, 2015 15:27:25 GMT -5 mollyanna58 said:

How many HELOC's were interest only?  I thought most were interest and principal, and when the term expired, you simply couldn't write any more checks on the account.

Home Equity Lines of Credit are normally interest only for the first ten years...Home Equity LOANS are interest and principal. Technically they are both loans, but lines of credit can be constantly dipped into and paid off for those ten years.  HE Loans are normally a one-time borrowing of money. 

I've had two HELOC over the years.  Both had interest and principal payments. I thought that was standard.

[djAdvocate]

Apr 25, 2015 17:53:02 GMT -5 zibazinski said:

If they can. If they've borrowed so much and have a mortgage as well, the house may not sell for what's owed on it.

i don't really understand how that could happen, but IF it did, then i think we can all agree that it had nothing to do with the original credit crisis, or the burst of the housing bubble, but being completely irresponsible in the wake of it.

i have a lot more out on that HELOC than $13.5k.  but, like the other poster, the HELOC was frozen out many many years ago.

here is why i don't think it will be a problem.  in my case, the HELOC owner is also the primary mortgage lender.  causing a house to foreclose because your mortgage customer can't afford to pay the HELOC makes no sense at all.  what DOES make sense is to "bundle" the loans together into new mortgage, and that is what i fully expect to happen.  which is why i think this is a chicken little story.

[djAdvocate]

Apr 25, 2015 18:02:14 GMT -5 haapai said:

It's entirely possible that the methodology that has been used to estimate the number of underwater and severely underwater homes is also flawed.  It's probably based on recent sales and tax assessments both of which are skewed in a manner that will make large numbers of houses look way underwater.  Both of those data sets tend to ignore the condition of the house in question and assume that the seller of the house was under the normal amount of pressure to sell. 

In my neighborhood, well-maintained owner-occupied houses appear to be selling for 50-100% more than REOs of similar age and square footage.  A whole lot of less-mobile-now folks are really happy to learn this. 

i find that the influence of foreclosure properties in my neighborhood is very significant. 

normally, our house appraises for about 10% over nominal for the county.  however, when a house foreclosed in my neighborhood, our house appraised at 20% BELOW market.  that is about 30% undervaluation if you are doing the math.

likewise, when a buyer came in and bought a house for 10% over market recently, our house appraised at about 20% over county average.  so, it goes both ways.  the influence of selling price in nearby comparables is quite large in a rural neighborhood like ours.

[EVT1]

I have a HELOC @ 3.9%- just use it for home improvement projects- has a 5 year draw with 10 year payment. In my case the house will be paid off long before then.  The monthly payment is interest and principle- and it changes every time I use the credit line- has a minimum of $500 checks or transfers.

I see nothing wrong with them as long as they are used smartly.  Now if I had taken what I qualified for rather than what I was comfortable with- an amount in my case about 1/5 of the equity- and went out and bought a new car and boat..........well that would be stupid

[mmhmm]

I wonder how many people were caught without enough funds to do necessary repairs during the downturn and now find their homes underwater because of needed repairs. Just a thought that occurred to me. Lots of folks lost their employment and many didn't get back to the salaries they were making before the bottom fell out.

[EVT1]

*** Might be my flawed thinking but since I am only using it on home improvement- the increase in value makes it a win-win when I am doing the work- except for the roof- but a new roof is a good selling point too   Even though I am not selling- going to rent it out and buy another home once it is paid for.

[EVT1]

Apr 25, 2015 19:43:21 GMT -5 mmhmm said:

I wonder how many people were caught without enough funds to do necessary repairs during the downturn and now find their homes underwater because of needed repairs. Just a thought that occurred to me. Lots of folks lost their employment and many didn't get back to the salaries they were making before the bottom fell out.

Or sold on the idea of ever increasing property values in hot markets.

[mmhmm]

Apr 25, 2015 19:49:13 GMT -5 EVT1 said:

Apr 25, 2015 19:43:21 GMT -5 mmhmm said:

I wonder how many people were caught without enough funds to do necessary repairs during the downturn and now find their homes underwater because of needed repairs. Just a thought that occurred to me. Lots of folks lost their employment and many didn't get back to the salaries they were making before the bottom fell out.

Or sold on the idea of ever increasing property values in hot markets.

I was just thinking how someone could have needed a new roof, or new windows, or some other major expense and have been in the process of saving for it, or whatever, when the bottom fell out of housing. There they are, sitting with a house that needs repairs, they lose their job and there's no money coming in. By now, they'd be sitting on a fixer-upper, to be sure!

[msventoux]

Can HELOC's be extended?  I got one around 2006 or so.  I think the rate was prime plus 1.  I don't have anything on it but was kinda keeping it in the back of my mind as an emergency fund for a roof replacement or addition down the road if necessary. 

[EVT1]

They can always be redone- if the equity is there. I used mine for a new roof- and it is a good emergency fund as long as you keep it reasonable- because you can't sell a house with a bad roof or other major problem. As long as you can sell the house for more than the mortgage and HELOC- that's where the reasonable comes in.  If they tell you qualify for 100K, take a 20K line.  That way if bad things happen and you had to sell you can be assured you will walk away with cash no matter what.  Unless of course you live in some wacky market.  That's where a lot of people got taken to the cleaners.

[djAdvocate]

Apr 25, 2015 19:53:38 GMT -5 msventoux said:

Can HELOC's be extended?  I got one around 2006 or so.  I think the rate was prime plus 1.  I don't have anything on it but was kinda keeping it in the back of my mind as an emergency fund for a roof replacement or addition down the road if necessary. 

i don't think lenders have been paying much attention to them.

ours is 2.875%, and i see no reason to mess with that.  it is the lowest rate of any of my vehicles i am carrying, so paying it off FIRST makes no sense.

we will carry the full balance, pay interest only, and only pay according to the schedule.  period.

[endofera]

I think it could be a real problem. We have a 10-year HELOC from 2005 which is maturing June, 2015. We have been carrying a balance of approx $20k at prime minus 0.5% (2.75%) almost the entire time and just paying the interest. The loan doesn't have any provisions for continuing past the June date; at that time, the entire balance is due.

I am sure that there are many many others who have this same type loan coming due and likely there are many with much much higher balances.

We have a lot of options to deal with ours because we have a lot of equity, good jobs, high credit scores, and money in the bank.

But I'm sure that a lot of people with this situation don't have the resources to either refinance or pay off the line and they very well could lose their homes because of it.

We will close on a refinance next week and were given an $80k credit limit. The new rate is 1.99% for 6 months then prime plus 0.5% (3.75%). As long as we are carrying a balance, there is a $50 annual fee waived in year 1. I don't like the fees or the rate so I'm going to pay it off over the next 12 months but keep the line open until it matures for emergencies.

I know, I know... I could borrow the max & put it in an S&P index fund but we are getting near retirement and when the balloon payment in 2025 rolls around, we may not have the same options for refinancing and rates could go up and the stock market down and I just don't want that risk.

[djAdvocate]

Apr 26, 2015 11:05:24 GMT -5 endofera said:

I think it could be a real problem. We have a 10-year HELOC from 2005 which is maturing June, 2015. We have been carrying a balance of approx $20k at prime minus 0.5% (2.75%) almost the entire time and just paying the interest. The loan doesn't have any provisions for continuing past the June date; at that time, the entire balance is due.

I am sure that there are many many others who have this same type loan coming due and likely there are many with much much higher balances.

We have a lot of options to deal with ours because we have a lot of equity, good jobs, high credit scores, and money in the bank.

But I'm sure that a lot of people with this situation don't have the resources to either refinance or pay off the line and they very well could lose their homes because of it.

We will close on a refinance next week and were given an $80k credit limit. The new rate is 1.99% for 6 months then prime plus 0.5% (3.75%). As long as we are carrying a balance, there is a $50 annual fee waived in year 1. I don't like the fees or the rate so I'm going to pay it off over the next 12 months but keep the line open until it matures for emergencies.

I know, I know... I could borrow the max & put it in an S&P index fund but we are getting near retirement and when the balloon payment in 2025 rolls around, we may not have the same options for refinancing and rates could go up and the stock market down and I just don't want that risk.

actually, what i have noticed through this thread is how different these loans are for people.  some, like yours, are lump sum.  that might be a problem, and it might not.  for example, i have at least two credit cards open that have balance transfer capability of over $20k.  if i had to lump sum YOUR loan, i could do that. 

some pay interest only, so they are not paying down the balance, but they have provisions for doing so in the loan.  mine is like that.  it reverts to a 2nd mortgage at 10, which is coming up, and they have a 20 year payment schedule.  if they honor that, my HELOC will actually pay off AFTER my 1st mortgage, which would be both hilarious and odd.

some pay interest and principle, so they are ALREADY whittling down their balances.

and, finally, as i stated earlier, if the HELOC lender is also the 1st mortgage holder, i am betting they are going to craft a deal which PREVENTS the 1st from going into default.  it is to their benefit.  they are not, ultimately, in the Real Estate business.  they are in banking.

[Angel!]

So it seems like the real issue is if people know their loan terms and are prepared. It's sad, but given the general financial knowledge of the average person, I'd say many don't have a clue. I think we are way above average in this group.

If you are happily just paying the minimum each month, clueless you are only paying interest, and suddenly get hit with a balloon payment or even just a huge increase you are probably in trouble. The same person who doesn't know the terms of their loan probably also doesn't have the savings or other options to cover an unexpected bill like that.

[endofera]

We received many letters and calls from the bank that has our line warning us that our line was coming due and making offers to get a new one.  At least a year of warnings so it shouldn't come as a surprise.  But even with a year's notice, if you have a high balance and no money, you could be in bad shape.  We waited until the last minute because of our low rate.  We new a new line would be at a higher rate.

Earlier I said we close on a refinance this week.  We are actually getting a new line with a different bank and paying off the old one at closing.  We received postcards in the mail from many different banks offering basically the same terms and chose to go with our hometown bank.  The banks know these lines are coming due and are advertising pretty heavily.

[EVT1]

Apr 26, 2015 14:27:14 GMT -5 Angel! said:

So it seems like the real issue is if people know their loan terms and are prepared. It's sad, but given the general financial knowledge of the average person, I'd say many don't have a clue. I think we are way above average in this group.

If you are happily just paying the minimum each month, clueless you are only paying interest, and suddenly get hit with a balloon payment or even just a huge increase you are probably in trouble. The same person who doesn't know the terms of their loan probably also doesn't have the savings or other options to cover an unexpected bill like that.

Doesn't help that a lot of scumbag companies are out there sending offers in the mail with giant dollar signs on them.

There should be a mandatory finance course taught in every high school that delves heavily into all of this.  Call it real world finance, or how not to get screwed by people out to screw you.  It should touch on every aspect of financial planning from your first job,car,apartment to retirement.

[TheHaitian]

Apr 26, 2015 15:20:50 GMT -5 EVT1 said:

Apr 26, 2015 14:27:14 GMT -5 Angel! said:

So it seems like the real issue is if people know their loan terms and are prepared. It's sad, but given the general financial knowledge of the average person, I'd say many don't have a clue. I think we are way above average in this group.

If you are happily just paying the minimum each month, clueless you are only paying interest, and suddenly get hit with a balloon payment or even just a huge increase you are probably in trouble. The same person who doesn't know the terms of their loan probably also doesn't have the savings or other options to cover an unexpected bill like that.

Doesn't help that a lot of scumbag companies are out there sending offers in the mail with giant dollar signs on them.

There should be a mandatory finance course taught in every high school that delves heavily into all of this.  Call it real world finance, or how not to get screwed by people out to screw you.  It should touch on every aspect of financial planning from your first job,car,apartment to retirement.

So how long do we keep on protecting people from themselves?

My wife and I get about 8-10/month credit card offers in the mail, about 3-4 HELOC offers since we bought our house, countless vehicle financing offers...

You know where they all go: the garbage! Some people really don't want to be saved because they will tell you: it won't happen to me, I am smarter than that.

I am all for educating people but it seems at time we turn it into a full time job trying to protect people against themselves. Some people that lost their houses knew from Day 1 they couldn't afford that house (I knew a few) yet they still went ahead.
---> when you are a taxi driver and your wife is a CNA, you know damn well you cannot afford a mortgage on a 320k house in NJ with 13k property taxes attached to it. It was a matter of time before you lost the house so do not act surprise and shock!

[EVT1]

How about a mandatory 72 hour waiting period before closing and a consultation with a financial expert