LPS: Amortizing Second Lien HELOCs Could Wreak Some Havoc

About 48% of outstanding second lien home equity lines of credit (HELOCs) were originated between 2004 and 2006 – and because a vast majority of those have draw periods of 10 years, many are set to begin amortizing over the next several years.

As the payments on these HELOCs become fully amortizing, many borrowers may see monthly payments increase. This, in turn, could lead to increased delinquencies or defaults over the next several years, warns Lender Processing Services (LPS) in its October Mortgage Monitor report.

‘In the aggregate, the home equity market is experiencing lower delinquencies,’ says Herb Blecher, senior vice president for LPS, in a release. ‘However, among the HELOC population that has already begun amortizing, we are actually seeing an increase in new seriously delinquent loans.

‘As of today, only 14% of second lien HELOCs have passed this 10-year mark, leaving a very large segment of the market at risk of payment increases over the coming years,’ Blecher adds. ‘Nearly half of all of these lines of credit were originated between 2004 and 2006, with the oldest set to begin amortizing next year. If this trend toward post-amortizing delinquencies carries over, we could be looking at significant risk to the home equity market over the coming years.’

Looking at the first mortgage market, LPS' data shows that the share of borrowers in negative equity positions has continued to decline as home prices have risen.

As of September, 11.6% of active mortgages were in negative equity, down from almost 19% in January.

LPS' methodology for arriving at its findings accounts for not only the current combined loan amount of first and second liens using comprehensive loan and property data, but also the impact of distressed sale discounts on loans in serious delinquency or foreclosure.

Blecher notes that although distressed sales represent an ever-shrinking portion of real estate transactions – just 14.2% in September, the lowest share since 2007 – these sales have prices about 25% lower than traditional transactions. He points out that improperly weighing the influence of second liens or distressed sale discounts can skew measures of equity, or lack thereof, in Americans' homes.

LPS' October Mortgage Monitor report also reveals that judicial foreclosure states are lagging in home price recovery since the national market's trough in January 2012, and are likewise seeing higher rates of new problem loans and foreclosure starts than their non-judicial counterparts.

However, increasing levels of foreclosure sale activity have helped improve pipeline ratios in judicial states, the report states. The judicial state pipeline ratio had declined from a high of 118 months of inventory, down to 47 months as of October, much closer to the non-judicial states' 39 months of inventory.

The total U.S. loan delinquency rate dropped 2.8% in October, compared to September, reaching 6.28% of all loans.

The total foreclosure presale inventory rate was 2.54%, a decline of 3.2% compared to September.

States with highest percentage of delinquent loans included Missouri, Florida, New Jersey, New York and Louisiana.

States with the lowest percentage of delinquent loans include Colorado, Montana, South Dakota, Arkansas and North Dakota.

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