A loan default is a nightmare for banks and the consequences for homeowners can haunt them for years. These fears could soon become a reality for both as billions of dollars in home equity credit lines or second mortgages are scheduled to reset, requiring borrowers to begin paying both principal and interest on their balances after 10 years.
The 10 year countdown timer started when home equity credit lines were extended during the housing boom. The reset could create a new wave of defaults as payments could rise by $500 or more per month, depending on the case.
If borrowers cannot or choose not to make the full payments that reduce the principle debt, banks can demand full payment or foreclose on the house. Federal financial regulators estimate that about $30 billion in home equity lines dating to 2004 are due for resets next year, $53 billion the following year and an astonishing $111 billion in 2018.
The uncertainty of borrowers being able to make larger payments will force banks to foreclose, refinance or modify existing loans. Tougher mortgage rules taking effect in January could make refinancing harder as many homeowners won’t qualify under new rules. Complicating the equation even further, interest rates are expected to rise from current low levels as the Federal Reserve adjusts its purchasing of Treasury and mortgage-backed securities.
In preparation of the coming bulge, the comptroller of the currency is urging big banks to set aside extra reserves for possible losses.
Homeowners with poor credit and unpaid balances are urged to take action before it’s too late. Check credit line documents to determine when the reset is scheduled and consider contacting the bank that owns the note for an estimate of post-reset payment total. It is important be aware of options on refinancing and loan modifications that could ease the payment pain.
Any failure to pay would be bad news for a consumer’s credit scores and could cause the borrower problems for years. Prevent trouble from happening by starting a payment strategy well in advance.
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