Borrowers who signed up for home equity lines of credit (commonly called HELOCs) in 2004 during the real estate price surge were 30 or more days late on $1.8 billion worth of outstanding balances four months after principal payments began, according to credit reporting firm Equifax.
That could lead to a new wave of delinquencies among HELOC borrowers as a large percentage move into the repayment phase, a report from Experian added. Banks are potentially facing billions in losses as a result as these principal payments coming due after years of interest-only payments. The $1.8 billion represents 4.3% of the balance on outstanding 2004 Helocs, according to Equifax - up sharply from the 2.7% delinquency rate on those same HELOCs one month before borrowers reached the end of the interest-only period, which typically lasts for 10 years. "There are some early signs of choppy waters ahead," said Dennis Carlson, deputy chief economist at Equifax.HELOC problems can spread to other facets of the economy and continue to be a lingering problem. Borrowers delinquent on HELOCs were found more likely to also be delinquent on other loans, according to Experian, which reviewed delinquencies on other consumer debts such as mortgages, credit cards, auto loans and auto leases.
Michele Raneri, Experian's vice president of analytics and business development, said that while home prices rebound in much of the U.S., there are concerns about the pre-recession HELOCs negatively impacting consumers and the overall economy.
Experian 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% to $37.04 billion in the same quarter last year, according to National Mortgage News, a Collections & Credit Risk sister publication. There are $265 billion in outstanding HELOC loans originated between 2005 and 2008, which are reaching the point where consumers can no longer borrow against them, according to Experian.