Second Mortgage foreclosures
Heloc second mortgage and property tax foreclosures should increase in 2018-2025. $265 billion in Home Equity lines of Credit mortgage loans (or HELOCs) will go into foreclosure from 2015 to 2018 according to Experian. Some homeowners 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. Since 2008, these loans were interest only. These loans are becoming due with balloon payments or short-term increased payments that will renew the foreclosure bubble. Along with it, Kentucky Counties are selling more and more property tax liens which increases foreclosure rates further.
Lenders are preparing for this new wave of foreclosures. HELOCS 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” become due. When it does, it has to be paid back, and the homeowner can no longer borrow. These HELOCs were on ten-year notes and will start to “lock out” these homeowners from making interest-only payments and borrowing any further.
Second mortgage foreclosures and Chapters 7 and 13 Bankruptcy
Most homeowners took out the maximum amount of cash for second mortgages trying to survive. Now they have to repay the amount borrowed plus interest. For many homeowners, the only answer is to file a Chapter 13 and strip second mortgages, if the second mortgage has no equity. Heloc second mortgages became negative equity mortgages when home prices fell. Helocs changed into primarily unsecured loans. The supreme court announced second mortgages can only be stripped in Chapter 13 on June 2015.
However for many lien stripping may not be an option. These people may owe 20 – 25% more than their homes than what it is 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 three 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. Homes with no equity can’t effectively refinance.
HELOC Second Mortgage Foreclosures
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. A home having negative equity 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 helocs will be able to refinance. But the majority of HELOCs will default and sell at foreclosures.
Loan-modification programs simply don’t offer help because there is little or no chance of principal reduction and only offer interest reduction. Bankruptcy allows a person to strip second mortgages with no equity. Bankruptcy allows homeowners to avoid the deficiency or tax consequences after the home is sold. A majority of these homes will probably foreclose. Over 10 million Helocs 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.