OCC Lowers Estimate of Home Equity Loan Resets
The looming threat posed by billions of dollars' worth of home equity loans due to reset their interest rates in the next few years has eased somewhat, according to new regulatory data.
The Office of the Comptroller of the Currency is now predicting that $167 billion in home equity lines of credit held by the largest national banks will reset between 2014 and 2017, a 21% drop from its previous estimate.
"The numbers have come down for a variety of reasons," said Darrin Benhart, a deputy comptroller at the OCC, citing refinances, modifications, pay-offs and charge-offs.
"This represents the success banks have had in starting to address this risk issue in a proactive manner," Benhart said.
Banks originated millions of HELOCs during the housing boom, helped by rising house prices, easy credit and the fact that borrowers only pay interest during the first 10 years.
Now the largest cohorts of HELOCs, originated between 2004 to 2007, are resetting and many of these second liens are underwater.
The 10-year, interest-only period is expiring and $23 billion in HELOCs are due to reset this year, which means the borrowers have to start making principal and interest payments on the outstanding draws.
This can lead to payment shock if the monthly payments go up by $400 or more. In that case, borrowers will likely need a modification or some form of payment relief to avoid default, according to one housing counselor.
Previously, OCC estimated that $29 billion of HELOCs would reset in 2014. That would jump to $52 billion in 2015, $62 billion in 2016 and peak at $68 billion in 2017.
Now, OCC estimates $23 billion of HELOCs will reset in 2014 followed by $41 billion in 2015 and $49 billion in 2016 and $54 billion in 2017.