250,000 HELOCs due to recast in Orange and LA Counties
In the next four years, 250,000 of HELOCs are due to recast in Los Angeles and Orange counties.
For the next several years, the housing market is a waiting game as lenders wait for higher prices to finally resolve their legacy loan problems. MLS inventory is low because lenders are denying short sales, approving loan modifications, and allowing delinquent mortgage squatters to live payment free. The lack of MLS inventory is forcing the depleted buyer pool to compete for available properties and bid up prices. As prices rise, collateral value returns, and lenders could foreclose and recover their original capital, which is why lenders are so motivated to see house prices go up.
Unfortunately, with so many borrowers underwater, lenders can’t foreclose and get their money back, so instead they modify loans to buy time until the resale value is higher than the outstanding loan balance. Banks would die if they foreclosed on all the properties with second mortgages and HELOCs. Therefore, in my opinion, banks will do whatever it takes to avoid foreclosing on these loans.
The lender’s options
Lenders have two main options when a borrower stops making payments on a loan: (1) foreclosure, or (2) can-kicking. The option lenders exercise depends almost entirely on the collateral backing of the loan. If the value of the property backing is insufficient to recover the outstanding balance of the loan in foreclosure, lenders will opt to kick the can instead. It’s really that simple.
The obviousness of this simple truth can be verified by looking back to how lenders behaved prior to the housing bust. Back when house prices only went up (or so everyone thought), lenders always foreclosed on delinquent borrowers — always. They had no incentive to kick the can with a loan modification because they could get back their money and loan it to another borrower who would pay according to the terms of the loan. It’s only when prices fell and the collateral backing wasn’t there that lenders starting can kicking.
Why would lenders behave any differently in the future when the housing bubble is fully reflated and lenders are able to foreclose and get their money back?
Have lenders become more socially conscience? ~~ giggles to self ~~
Have lenders’ incentives changed? I fairly certain they don’t want to make loans then unilaterally provide better terms to the borrowers if lenders don’t have to.
Realistically, lenders will go back to their previous loss mitigation procedures once prices reach the peak. Lenders will rescind the loan modification entitlement when prices reach the peak because they are better served by recovering their capital. Further, I believe the final resolution of loan modifications will push people out of their homes because most borrowers who got in over their heads will still be in over their heads when prices reach the peak; at that point, they will have to either pay up or get out, and most will be forced out.
LOS ANGELES (CBSLA.com) — At the height of the housing bubble a decade ago, a home equity line of credit seemed like an answer to a prayer.
La Mirada mother Liberty Gutierrez built two businesses, renovated her home and bought three more properties: “For the first 10 years, anything I borrowed and used was interest-only when I paid it back.”
But this year her $175,000 home equity line of credit (HELOC) resets. It’s not just the interest she now has to pay but the principal. Her payments will jump from around $400 to $1,700 a month.
That’s the difference between a reset and a recast. If the loan was merely resetting the interest rate, there would be no payment shock, but when the terms recast from interest-only to fully amortizing over 20 years, the payment shock is enormous.
“I’m not behind, I’m not unemployed, I’m not underwater. But that still doesn’t mean I can afford such a jump in a mortgage payment every month,” Gutierrez said. “I have no idea what I’m supposed to do with this property.”
She’s going to have to sell it and pay off the loan. Duh!
She isn’t alone.
According to RealtyTrac, 3.3 million homeowners nationwide have a HELOC that’s scheduled to reset in the next four years, and 250,000 of those are in Los Anglees and Orange counties. That’s the largest number of HELOCS of any metro area in the country.
“SoCal was the hotbed for home equity lines because so many people gained so much equity in their homes so quickly that it was very tempting to take that money out 10 years ago,” RealtyTrac Vice President Daren Blomquist said.
But today, “it converts to a 20-year fully-amortizing loan. And so your payments are gonna go up quite a bit,” Blomquist said.
He says starting this year HELOC’s handed out before the housing bubble burst will set off a new wave of foreclosures: “A lot of homeowners who took out these HELOC’s during the bubble, can’t refinance because they are underwater on their homes. These homeowners are not only underwater … now they’re seeing this higher loan payment. The combination of those two triggers, in my mind, represents a lot higher risk, that these homeowners will finally throw up their hands and just walk away.”
The biggest surprise for Blomquist was RealtyTrac’s study that found 56 percent of homes with a HELOC nationwide are underwater. In Southern California, 60 percent are underwater.
He says the timing couldn’t be worse: “This is coming at a time when home price appreciation is slowing down.”
“These people, they can’t just refinance out of that situation. They’re gonna need a little more help to get out of it,” he said.
Time for the bailout plea.
For Gutierrez, an answered prayer has turned into a nightmare: “There’s gotta be some kind of help for people like me the same way there was help for people who made a mistake and were able to refinance, walk away from their home, short sale it.”
Where’s my bailout!
Home equity lines of credit (HELOCs) were the favored tools of Ponzis during the housing bubble. These were used like a credit card with an ever-expanding credit balance that didn’t need to be paid back because the house was paying for it. Most borrowers viewed this as truly free money, and they behaved accordingly. This influx of spending drove the economy during the first half of the 00s, and the elimination of this stimulus and the subsequent need to repay this debt is what’s causing our economic doldrums today.
Some HELOCs will be allowed to recast
I believe lenders will selectively allow some HELOCs to recast and they will modify others. They will decide this on a loan-by-loan basis with two basic criteria: (1) property must have equity, or (2) the borrower must have other assets. If neither of these criteria is met, the lender will unilaterally modify the terms of the loan again to buy more time until one of the two criteria is met. If the first criteria is met, they will foreclose on the property. If the second criteria is met, they will allow the HELOC to recast and let the process play out. As long as they know a source of cash exists, they have no need to amend-extend-pretend any longer.
Do any of you expect anything different?