For Aaron Horvath, a housing counselor who has spent much of the last five years advising homeowners on getting first-lien loan modifications, it feels like the other shoe is dropping.
Once again, homeowners are beginning to see their monthly payments go up, this time because their home equity lines of credit have reached the 10-year mark and are resetting. Instead of requiring just interest payments, the second lien becomes fully amortizing and the borrower has to pay both interest and principal each month for the first time.
It is going to be painful for many borrowers who could see their monthly mortgage payments go up by $400 or more, according to Horvath, an executive vice president for Springboard Nonprofit Consumer Credit Management Inc. in Riverside, Calif.
"Just when you think you are climbing out of it, and then you got these adjustments," he says.
If the increase is $100 to $200 a month, consumers are more than willing to make lifestyle adjustments to stay current on their payments, Horvath says. But when the increase is $300 to $400, it creates a "shock wave for consumers," causing the borrowers to start thinking about whether they should continue making payments. They will be looking for some relief.
The Office of the Comptroller of the Currency has been warning banks and thrifts about the coming spike in HELOC resets since September. OCC officials are urging depositories to be proactive in response to this looming consumer debt problem.
So far, the effort appears to be having some results. The OCC originally estimated that $211 billion in HELOCs held by the largest banks would reset in 2014 through 2017. The banking regulator recently lowed that estimate to $167 billion of resets.
"The numbers have come down for a variety of reasons," involving refinances, modifications, pay-offs and charge-offs, says OCC deputy comptroller Darrin Benhart. "This represents the success banks have had in starting to address this risk issue in a proactive manner."
Most banks have set aside loan loss reserves for possible defaults and some are planning to conduct outreach campaigns to inform their HELOC customers about their options if they get into trouble.
"It would be hard to image a scenario where we have a bunch of HELOCs resetting at unaffordable prices where we didn't do some kind of a modification," says Rick Sharga, an executive vice president at Auction.com.
The improvement in the economy, the recovery of housing prices and decline in unemployment rates have reduced the risk of HELOC resets, says American Bankers Association executive vice president Bob Davis.
"We have not heard from our bankers that this is going to be a big problem. Or that they are anticipating that they will need to change their ordinary procedures," Davis says.
The Federal Deposit Insurance Corp. recently reported that federally insured banks and thrifts held $510.8 billion in outstanding HELOC draws at yearend 2013, down from $554.9 billion in the fourth quarter of 2012.
Net charge-offs totaled $2.3 billion during the second half of 2013 compared to $6.7 billion in the second half of 2012.
But the percentage of HELOCs that are 90 days past due or in non-accrual status (where the lender expects to record a loss) has ranged from 2.6% to 2.9% over the past six quarters.
There seems to be a steady stream of borrowers who are falling behind on the HELOC payments but there hasn't been a spike in delinquencies yet.
Meanwhile, major banks continue to monitor their reset risk and Citigroup is particularly concerned about the impact of rising interest rates.
Citi had $18.9 billion in HELOCs at yearend and $1.2 billion is slated to reset in 2014, another $4 billion in 2015, $5.2 billion in 2016 and $5.1 billion in 2017.
"Citi currently estimates monthly loan payments on its revolving HELOCs that reset during 2015-2017 could increase by $360 or 170%," based on current interest rates, the bank says in its 2013 annual financial report. "Increases in interest rates could further increase these payments,"
The delinquency rate (30-days or more past due) has risen to 6% on the limited number of HELOCs that have reset so far, "However, these resets generally occurred during a period of declining interest rates, which Citi believes has likely reduced the overall payment shock to the borrower."
To get ahead of this issue, Citi identifies borrowers who are unable to refinance their HELOCs and may have difficulty making payments after it resets. "Then, we provide customized assistance based on our borrower analysis," CitiMortgage spokesman Mark Rodgers says.
JPMorgan Chase has $50 billion in HELOCs. But the banking giant says $20 billion is unlikely to be affected by resets due in part to low interest rates. Looking at the other $30 billion in HELOCs that are slated to recast over the next four to five years, Chase expects $16 billion will prepay. The borrowers could refinance into a new draw period or do a cash-out refinancing to pay off the HELOC, according to a Chase spokesman.
The OCC's latest estimate calls for $23 billion in HELOCs held by the largest banks to reset in 2014, followed by $41 billion in 2015, $49 billion in 2016 and $54 billion in 2017.