Batten-down the hatches: home equity loan defaults approach

Home equity lines of credit (HELOCA mortgage loan enabling a homeowner to borrow against their home's wealth, as an AT.M) borrowers are about to collide with reality as the initial interest period expires for many of these loans. To date, many borrowers who took out HELOCs during the Millennium BoomThe years 2000-2007 leading up to the current economic recession, characterized by loose lending practices and unsustainably high property prices and sales volume.The years 2000-2007 leading up to the current economic recession, characterized by loose lending practices and unsustainably high property prices and sales volume. have made only minimal payments, covering interest, but not reducing the principal balance of their loans.

Between 2014 and 2017, 60% of all HELOCs will start requiring principal payments, according the Office of the Comptroller of the Currency. By 2018, $111 billion of existing HELOCs will switch to include principal payments in addition to interest.

Borrowers will find themselves in a tight place since many of the junior liens originated during the boom were adjustable rate mortgages (ARMs). Further, because property values have plummeted since the origination of these HELOCs and a majority of loan modification programs leave second mortgages untouched, refinancing the loans under better terms is impossible for many borrowers.