Experian warns lenders to prepare to can-kick recasting HELOCs
The wave of HELOC recasts is upon us, and lenders must cut deals with borrowers or face another wave of delinquencies and foreclosures.
Since last night was the kickoff of the NFL regular season, it’s only fitting that lenders prepare for another long season of can-kicking bad loans. This time, instead of first mortgages going bad, the second mortgages sitting on top are due to recast.
A loan recast is different than a rate reset. When a loan resets, the payment could go up or down depending on the prevailing rate at the time. However, when a loan recasts from an interest-only payment to a fully-amortized payment, the payment will almost certainly go up — probably quite substantially.
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 caused the economic doldrums of the last decade.
Some HELOCs will be allowed to recast
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?
Firm advises caution as some borrowers are expected to suffer payment shock.
September 08, 2016
Experian was out Thursday with a new white paper on home equity lines of credit (HELOCs) that reports a rebound is underway that affects consumers and lenders positively, with “consumers making payments on time and being responsible with their financial debts.” It does sound a cautionary note, however, stating, “consumers and lenders still should proceed somewhat cautiously as $236 billion in HELOC debt originated between 2005 and 2008 is now nearing repayment.”
This is no small problem as 250,000 HELOCs are due to recast in Orange and LA Counties alone.
“During the housing boom, home equity lending was heating up, but lenders pulled back significantly as home prices began to fall,” said Michele Raneri, vice president of analytics and new business development. “What we’re seeing now is that home values have recovered, but the end of draw is still a factor that needs to be considered when it comes to consumer and lending behavior.”
Notice how cryptic they become when discussing this issue. In simpler terms, borrowers aren’t strong enough to actually repay these loans. Many borrowers are strong enough to tread water on an interest-only basis, but if the borrowers need to pay extra toward principal, that will push many of them into insolvency.
Among findings in the white paper:
- $29 billion in HELOC debt originated between 2005 and 2008 has been paid down over the past 12 months, as many of these lines of credit are in or are approaching their repayment period.
When they say these loans were “paid down” it conjures up images of borrowers repaying these loans with their own money out of their wages. That isn’t what happened. The repayments were most often a refinance into another loan or a repayment when a house sells that isn’t underwater.
- As of Q4 2015, originations were up 111%, to $43.03 billion from $20.44 billion in the same quarter in 2010.
What could go wrong?
- Delinquencies associated with HELOCs have decreased to near pre-recession levels; in Q4 2015, 0.49 percent of consumers with an open HELOC were 90 to 180 days past due.
- Consumers with a HELOC in repayment were more likely to both close and open other HELOCs in the next 12 months. They also were more likely to open or close a mortgage in the next 12 months.
- The study further evaluated what could happen to these loans and other loan products. It found that consumers coming to the end of draw on their HELOC are more likely to become delinquent — not just on the HELOC, but also on other types of debt such as mortgage, auto loan, auto lease and bankcard trades — as the increase in repayment burden could mean higher monthly payments.
“Many consumers have dealt with repayment well, while others may experience payment shock,” continued Raneri. “The best path forward in this situation is for consumers to fully understand this potential payment stress, use resources available to them and to work closely with their lender to navigate these changes. If consumers have good credit and equity in their homes, they most likely can refinance their HELOC.”
Notice how this author emphasizes the education of consumers when in reality it’s the lenders who need education. This is a stealthy way to tell lenders to prepare for another round of loan modification can-kicking.
And why not? Lenders succeeded wildly with loan modifications to troubled borrowers. The policy was so effective that loan modifications are now standard operating practice for loss mitigation at major lenders. Whenever and wherever a loan has collateral backing worth less than the outstanding balance, the borrower will be offered a loan modification — at least until the value of the collateral is worth more than the outstanding loan balance. At that point, the lender will return to their old practices of speedy foreclosure.