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The Coming HELOC Crisis & Opportunity


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A recent study by TransUnion points to another mortgage bubble

reverse mortgage newsThe next mortgage bubble with pending HELOCs written in the mid 2000’s could spell opportunity for reverse mortgage lenders and originators alike. A recent study by TransUnion echoes what some mortgage experts have been warning us of in the last year: there is a coming HELOC bomb that could explode in the coming years. The study shows as of the end of 2013 nearly 16 million U.S. consumers hold over $400 Billion in Home Equity Lines of Credit. TransUnion estimates nearly 15 percent or up to $70 billion dollars of these accounts may be at risk of defaulting in the next few years. Even more sobering is the fact that more than half of these loans have balances of over $100,000…

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  1. While HECMs are loans against the total value of the home since all existing liens must be paid off during closing, true HELOCs are loans against the equity of the home. It is strange these two get so confused.

    For example, Shannon quotes Steve Chaouki, head of financial services at TransUnion, as saying: “For many people, HELOCs represented a low-interest rate opportunity to borrow agains the value of their homes.” [Sic]

    In an article titled “Using a Reverse Mortgage to Pay Off First Mortgage” and posted on Fox Business News on August 13, 2014, Polyana da Costa quotes Maggie O’Connell as saying: “They already have this debt on the house, so instead of making their mortgage payments they are just paying it out of their equity before they leave the home,” Since the value of a home is its value minus the total of all existing liens, Maggie’s statement is odd at best.

    • Cynic, So What? This technicality contributes nothing to the discussion of heloc resets.
      Like it or not, a property must have a VALUE in excess of any existing mortgage in order to borrow “against the value”. Rest assured everyone understands the relevance of “equity”. Now, let’s get back to the heloc reset discussion if you don’t mind.

      • Jim,

        What over simplification.

        In California off and on we have had 125% LTV mortgages. Many are still in existence. These loans are effectively nonrecourse mortgages in California. Some of these mortgages were originated when the existing mortgage due was already greater than the value of the home.

        Today we see new mortgages being placed on property where the mortgage balance due is greater than the value of the home. In the past we have seen homeowners come to closing with cash to pay down the mortgage whose balance slightly exceeded the value of the home, just to get a mortgage with a much lower interest rate. Today we see write downs of large amounts of principal. In none of these cases was the existing mortgage balance due less than the value of the home at the time of closing, yet the mortgages were issued in some cases up to 97% of the value of the home and in others up to and exceeding 100% of the value but all were nonrecourse debt.

        When we use the right words to express our ideas, then there is little to no room for misinterpreting the author.

      • Mr. Spicka,

        Over the years, I have had prospects telling me what the equity of their home is plus their age and then asking me how much they can get in HECM proceeds. By equity some meant what they thought the value of their home was at the time while others were telling me what the difference between the value of their home and the balances due on the liens against the property were.

        In two cases the prospects told me that they had $100,000 in equity but one had a home worth $150,000 and liens of $50,000 against it while the other had a home worth $1,150,000 and debt of $1,050,000. The youngest borrower in both cases was about 70.

        So if you have a way to tell a senior how much is available in the way of HECM proceeds from knowing just the equity in the home, the age of the senior, and nothing else, please let us all know what that is.

        I cannot tell you how troubling it is to hear HECM originators telling seniors that by getting a HECM, they can increase their monthly income through lump sum or monthly payments. The last time I heard that line before coming into the industry was from Enron executives just before being indicted for fraud for classifying debt proceeds as income on their financial statements.

        Words do matter and we should be accountable for what we write even if that is off topic.

        (The opinions expressed in this reply are not necessarily those of RMS or its affiliates.)

        • Mr. Veale, with the conventional proprietary products both of your examples can be served!
          I am disappointed by your interpretation of my intentions in reminding us of the importance of LTV when staring longingly and licking our chops at the sum of all the “untapped equity”. It is a fact that boomers are coping with mortgage indebtedness that is going to exclude many homeowners.
          Others who are hoping current lenders will “write down” all the upside down loans to the extent necessary to allow for hecm eligibility are really smoking something recently legal in some states.

  2. Shannon,

    Have you seen any demographic information that breaks down the information into those with this loans who are 65 (of course 62 would be best) or older and also by loan balances? That information would be very useful.

  3. All of these “big numbers” are meaningless until we know what the average “LOAN TO VALUE” ratios are so we can assess the potential for HECM’s as a rescue tool.
    Truth is likely that with all the new “protections” being heaped upon the hecm program most homeowners are ineligible for a hecm at this time.
    We could address this problem to a small degree by urging HUD to allow secondary secured and unsecured borrowing in order to increase the number of eligible borrowers and help them reduce if not eliminate their mortgage or installment indebtedness so they can remain in their homes.

  4. Can someone please give a concrete answer as to why seniors are compelled to pay the “school tax” portion of the usual property taxes. Since seniors gain nothing from this burden, why ask for this payment. Since this is the largest portion of the property tax burden, eliminating it completely would allow more seniors to live a comfortable, worry free life in their own homes—-just my opinion

  5. call a BB&T bank rep about helping them with folks whose HELOC reset and they can’t afford the new payment but are over 62? crickets

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