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Predicting the impact from future HELOC loan resets

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Mortgage Professional America | 26 Nov 2014, 07:38 AM Agree 0
An estimated $190 billion in HELOC mortgages will reset between the fourth quarter and 2017. Will the payment shock cause a wave of defaults and negatively impact bank balance sheets and the mortgage market?
  • Wm Matz | | 01 Dec 2014, 05:53 PM Agree 0
    This article provides some valuable insight quantifying the HELOC reset problem and estimating the realistic impact. However, the narrow focus of the article omits consideration of some other important points:
    1. Althought the 10/20 HELOC is the most common, I have also seen 5/25, 15/15, and even 20/10. So not all HELOCs will reset at 10 years, further limiting the impact. [Note that the payment shock for a 20/10 will be far greater.]
    2. There are several other factors that will contribute to overall payment shock. Many mods are only fixed for 5 years; so those from 2007-9 are already rising from the initial rates as low as 2%. Many hybrid ARMs are coming out of the initial fixed, interest-only phase, with similar impact to the HELOC reset but on much larger amounts. Finally, we appear to have reached the end of the overall low interest rate environment, as FED actions foretell rates generally rising in 6-18 months. When all of these and other factors combine with HELOC resets, the total effect may be much greater.
    3. The article is at least partially incorrect about 1st re-pricing. At origination 1st pricing has long been impacted by the presence and size of 2d's. However, the article is correct that there is no mechanism that re-prices 1st's when a 2d is later taken out.

    While I would have preferred an article with broader scope that addressed the above issues, the article is helpful to our understanding of the looming payment shock problem.
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