As much as $79 billion in home equity lines of credit are at heightened risk for default in coming years as Americans face a day of reckoning on their boom-era second mortgages, a new study found.
Many home owners who took out so-called HELOCs during the housing bubble have been paying only interest on the lines of credit.
Now, said credit rating firm TransUnion in a report released Thursday, they are nearing their end-of-draw terms, meaning they can't borrow from the lines and have to start paying back principal along with interest.
That, TransUnion said, could lead to payment shock -- and possible defaults.
The most at-risk loans account for 11% to 19% of balances yet to mature -- or $50 billion to $79 billion, the study said. While that amount is significant, TransUnion Vice President Ezra Becker, the study's co-author, said the risk was manageable.
Most borrowers, Becker said, have the ability to deal with the increased payments, and lenders can contact and try to make arrangements with those most prone to default, typically borrowers with lower credit scores and those less able to adjust to sudden jumps in expenses.
“A lot of people are worried that the sky is going to fall,” Becker said. “The numbers indicate the majority of HELOCs are low risk.”
Home equity lines of credit enable homeowners to borrow up to a predetermined amount at their discretion. During last decade’s housing boom, Americans borrowed feverishly against their rising equity, often using the lines for cars and vacations.
The credit lines usually run dry after 10 or 15 years, forcing borrowers to make set payments on the debt monthly or pay the entire amount.
But unlike years prior, Becker said, borrowers can absorb potential payment shock more easily as the economy and job market improve. Home prices also have risen sharply in the last two years, making it easier for borrowers to refinance or sell their homes if they get into trouble.
Banks, meantime, have been taking action to mitigate the risk.
Officials at Bank of America Corp. and Wells Fargo & Co. have said they are contacting borrowers well before their credit lines mature, making sure they are prepared to make higher payments.
If necessary, the banks said, they are talking to borrowers about modifying the terms of the credit lines.
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