Banks are potentially facing billions in losses as homeowners face a rude financial awakening after embarking on a borrowing binge 10 years ago.
Borrowers who took out home-equity lines of credit (commonly called Helocs) when real-estate prices were surging are struggling to keep up as principal finally comes due after years of interest-only payments, The Wall Street Journal reported.
Homeowners who signed up for Helocs in 2004 were 30 or more days late on $1.8 billion worth of outstanding balances four months after principal payments began, according to data provided to Journal by credit-reporting firm Equifax.
That represents 4.3 percent of the balance on outstanding 2004 Helocs, according to Equifax —a sharp rise from the 2.7 percent delinquency rate on those same Helocs one month before borrowers reached the end of the interest-only period, which typically lasts for 10 years, the Journal reported.
With a Heloc, consumers borrow against the equity they have in a home. Monthly payments can rise by hundreds of dollars when the interest-only period ends.
“There are some early signs of choppy waters ahead,” said Dennis Carlson, deputy chief economist at Equifax.
And such a problem with late payments on Helocs may spread to other facets of the economy — and continue to be a lingering problem, experts warn.
Borrowers delinquent on their Heloc were found more likely to also be delinquent on other loans. Global information services group Experian
looked at delinquencies on other consumer debt like mortgage, credit cards, auto loan and auto lease.
Experian also found that Heloc originations have been rising since 2010 after falling during the recession when borrowers had little equity in their homes. Heloc originations were $20.44 billion in originations in the fourth quarter of 2010, but soared 81 percent to $37.04 billion in the same quarter last year, National Mortgage News reported.
"As home prices have rebounded in much of the country, we're seeing the same trend with Helocs," said Michele Raneri, Experian's vice president of analytics and business development.
"This could be a sign of the economy further recovering, yet there are still concerns about the pre-recession Helocs that are now in repayment and how that could negatively impact consumers and the economy as a whole."
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