Home equity lines of credit (HELOCs) originated during the housing bubble years of 2005 to 2007 have either reached or will soon reach their 10-year “end of draw” period, at which point borrowers will face a payment shock that may cause delinquency rates among HELOCs to rise substantially.
According to Black Knight Financial Services’ July 2015 Mortgage Monitor released Tuesday, HELOCs originated from 2005 to 2007 make up more than half (54 percent) of the current HELOC universe. These borrowers are facing full amortization of outstanding balances for the next two and half years, which means that approximately three million borrowers will see their monthly mortgage payment increase by an average of $250. About 550,000 to 600,000 borrowers will experience that increase within the next six months, according to Black Knight.
“This remains a situation that bears close watching.”
Furthermore, despite improving overall equity positions, about 29 percent of borrowers facing end-of-draw periods and subsequent payment shocks have less than 10 percent equity in their homes, which will make refinancing problematic, according to Black Knight.
“To give an idea of what this could mean, consider that new non-current rates—HELOCs that were current six months ago and are now at least 60 days delinquent—are up 44 percent year-over-year on HELOCs originated in 2005, and total delinquencies on that vintage’s HELOCs are up 19 percent year-to-date,” Black Knight Data & Analytics SVP Ben Graboske said. “This remains a situation that bears close watching.”
The credit quality of recently originated HELOCs has greatly improved. HELOCs originated in Q1 2015 had the highest weighted average credit score on record—about 40 points higher than in 2005. The improvement of credit quality for HELOCS has resulted in overall delinquency rates for HELOCs falling to their lowest level since 2007, but the delinquency rate for HELOCs originated during the housing bubble years has been much higher. Year-to-date in 2015, HELOC delinquency rates were at 11 percent, but those with a 2005 vintage had a 19 percent delinquency rate. The number of seriously delinquent HELOCs year-to-date with a 2005 vintage is estimated at between 45,000 and 50,000, according to Black Knight.
Prepayment rates, which are historically a good indicator of refinance activity, for 2005 vintage HELOCs are outpacing the rates seen last year for 2004 vintage HELOCs—which suggests that borrowers who are able to refinance are taking advantage of low interest rates. Out of the number of HELOCs scheduled to reset during the first half of 2015, 23 percent have either been paid off or are no longer active, according to Black Knight. The number of outstanding 2005 vintage second-lien HELOCs has been reduced by 15 percent during the first half of 2015, Black Knight reported.