For many, the housing market crash of 2008 is fresh in their minds. The implications surrounding the housing market crash led to many foreclosures around the country. Though the housing crisis is behind us, a recent report from Experian presents the possibility that the nation may experience another foreclosure rush on properties nationwide. This may also lead to mortgage notes getting auctioned off again by banks and lenders.
From 2005 to the beginning of the housing crisis, home equity lines of credit (HELOCs) originations spiked. Since many HELOCs enter the repayment period after 10 years, the repayment phase is narrowing in on consumers as they will soon have to repay billions of dollars in outstanding credit balances. According to Experian, about $265 billion in HELOCs will enter the repayment phase in the next few years, and many consumers can expect to see their monthly payments soar. Some consumers may even be paying triple or quadruple what they have previously paid.
HELOCs are usually separated into two phases: draw and repayment. During the draw phase, consumers can use the HELCO and make minimum, interest-only payments. When the HELOC resets, they can’t borrow from the HELOC anymore and have to restore the equity that still needs to be repaid. The problem is during the 10-year draw phase many consumers have been taking the maximum amount without trying to pay down the outstanding amount. These HELOCs were opened during a time when home values were expected to rise. However, this did not happen and many borrowers with be faced with a large debit that will likely be very burdensome to their finances.
Some people will be able to handle the drastic changes to their monthly payments, while others will be forced to default. Many homeowners with HELOCs do not have sufficient equity or credit to refinance to a single new mortgage. This hard truth may lead to a huge wave of foreclosures across the country and mortgage notes getting auctioned off by banks and lenders.