Home Equity Lines of Credit or HELOCs are one area of focus of the July Mortgage Monitor issued by Black Knight Financial Services on Tuesday. The company said there is still concern about possible payment shock for homeowners with HELOCS as the millions put in place during the housing boom reset and begin to amortize.
Black Knight estimates that at least 2.5 million borrowers face these resets over the next three years. At that point the period during which borrowers can draw down on their home equity through these loans will end and the loans will convert from an interest only payment schedule to a fully amortizing one. The average increase in payments is estimated at $250 per month.
According to Kostya Gradushy, Black Knight's manager of Research and Analytics, this average could increase if homeowners continue to draw on their HELOCS until they reset. "Black Knight's analysis of outstanding HELOCs that have yet to reset is based upon current utilization ratios," said Gradushy. "Currently, borrowers whose HELOCs will reset over the next three years are utilizing just under 60 percent of their available credit. Further draws on these lines - for those that have not been locked - could result in 'payment shock' after they are reset that is even higher than the national average of $250 per month. Looking further down the road, HELOCs not likely to reset until 2019 are exhibiting even lower utilization ratios - about 40 percent of available credit. Upon reset, those borrowers are currently facing average monthly increases of $200. Should their drawing pattern match that of older vintages, we could be looking at a significantly higher risk of 'payment shock' for this segment."
Black Knight's preview of Mortgage Monitor delinquency data, released last week, showed a general downward trend in delinquencies and foreclosure activity with the delinquency rate down 1.13 percent month-over-month and the foreclosure inventory dropping by 1.85 percent. The full Monitor data released today also showed continued improvement in new problem loans. At a rate of 0.6 percent of all active loans, these new delinquencies are now firmly back to 2005-2006 levels.
The pattern of dropping rates of new delinquencies is also being observed in loans other than first mortgages. Rates of new problem loans among HELOCs and other junior liens are also at multi-year lows
"Roll rates" (the number of loans that shift from current into progressively more delinquent statuses) have been improving over the long term across all categories. Black Knight has observed roll rates increasing on loans shifting from 60 to 90 days delinquent and from 90 days to foreclosure over the last four months. It should be noted, however, that nearly 75 percent of 90-day defaults and almost 80 percent of foreclosure starts are from loans originated in 2008 and earlier.
Gradushy said Black Knight also looked at bank home retention activity and found that current levels have declined along with delinquencies and foreclosures. However they also found that retention activity is still high relative to current levels of distressed loans. "On a state-by-state basis, home retention activity does not always correlate with the amount of distressed inventory. Such activity is much higher, for example, in California - where nearly 12 percent of distressed loans were the focus of some form of retention efforts - than in any of the other states in the top five ranked by distressed inventory. In contrast, in the other four states in the top five (Fla., N.Y., N.J. and Ill.) just over six percent of loans on average saw home retention actions," Gradushy said.