$265 billion in Home Equity lines of Credit mortgage loans (or HELOCs) will go into foreclosure from 2015 to 2018 according to Experian. Some home owners will have to increase these monthly second mortgage payments by 3 to 4 times the present monthly amount. These HELOC loans were popular from 2005 until 2008 before home values fell. For the last ten years these loans were interest only. But now those loans are becoming due with balloon payments or short term increased payments that will renew the foreclosure bubble.
Lenders are preparing for this new wave of foreclosures. The HELOCS were designed to allow homeowners to draw on their home equity during the draw period. During this time the homeowner only had to make minimum, interest-only payments. Many homeowners did that during the recession, but eventually the HELOC “resets” and becomes due. When it does it has to be paid back and the homeowner can no longer borrow. These Helocs were on 10 year notes and will start to “lock out” these homeowners from making interest only payments and borrowing any further.
Heloc Loans and Chapters 7 and 13 Bankruptcy
Most homeowners took out the maximum amount of cash trying to survive the recession and now have to repay the amount borrowed plus interest. For many homeowners the only answer will be to file a Chapter 13 and strip these second mortgages, if the second mortgage has no equity. These special second mortgages were given out just before home prices plummeted and now many of them are unsecured or under secured loans. On June 1 2015 the supreme court announced that a second mortgage could only be stripped in a Chapter 13.
However for many lien stripping may not be an option. These people may owe 20 – 25% more than their homes are worth and may need to simply file a Chapter 7 bankruptcy and walk away from their home. For many these HELOCS were huge credit cards that have been at or over the limit on very low interest rates for years. All of these loans have had no reduction in the balances and will mature within the next 3 years.
How much these mortgage payments will increase depends on the interest rates and the term of the loan. Many of these HELOCS have no repayment periods and the entire balance will become due. Others have no way to refinance the loans because more is owed on the home than what the home is worth.
Very few homeowners will be able to afford these balloon payments or be able to refinance to save their home. Most homeowners have known this and have put off maintenance on their homes. These homeowners plan to defend the foreclosure by filing answers and discovery until the home must sell and have given up any hope of saving the homes. According to Charles Phelan, a debt-relief consultant who specializes in HELOC negotiation, the lack of equity and ability to repay simply limits homeowners options “due to real estate prices having dropped to the point where the most HELOCs are not covered by equity. This blocks people from refinancing to a single new mortgage at a more reasonable payment level.” Phelan said “A lucky few will be able to absorb the new high monthly payment without defaulting and thereby risking foreclosure… Some will have sufficient equity to obtain a traditional refinance to a new single mortgage” But it seems the majority of the HELOCS will default and be sold at foreclosures.
Loan-modification programs simply don’t offer help because there is little or no chance at principle reduction and only offer interest reduction. Bankruptcy may allow a person to strip these second mortgages or will allow a person to avoid the deficiency or tax consequences after the home is sold. A majority of these homes will probably foreclose. More than 10 million of these contracts were issued from 2005-2008. This translates to another wave of defaults and will be an additional downward drag on America’s housing recovery for years.