Almost ten years ago, during the housing boom, homeowners began taking out Home Equity Line of Credit loans, more commonly known as HELOCs. Beginning around 2004, these loans became popular because the interest rates were typically deductible under federal and state income tax laws. They were also popular because of their flexibility and most gave the borrower ten years to pay back.
There are more than $221 billion dollars in HELOC loans that will be due shortly as they near that ten-year mark. In 2005, there were over $502 billion HELOCs, meaning more of these loans will be due in 2015.
HELOCs (pronounced Hee Lock) are loans lenders gave for a period of 5 to 25 years (typically 10 years) for the amount equal or up to the amount of equity the borrower had in their home. HELOCs have variable interest rates normally based on the prime rate.
Unlike a Home Equity Loan, where the borrower gets all the money upfront, the HELOC uses a line of credit the borrower can use (draw upon) when needed, much like a credit card. The borrower gets charged interest on the amount drawn. The full principal amount is due at the end of the draw period in a lump sum (balloon payment). The amount could also be paid back if a loan amortization schedule is in place. Some HELOCs allowed the option of paying interest only payments, which are great the first few years but make for higher monthly payments later.
The height of the popularity of HELOCs occurred right before the housing bubble burst. Now, banks stand to have a surge in HELOC defaults, which could lead to more foreclosures.
The banks stand to lose billions of dollars since the HELOCs are generally a second mortgage, not the first. When a foreclosed home is sold or auctioned, most of the sale’s proceeds will go to pay off the first mortgage. Any leftover proceeds would then go to the HELOC lender. The HELOC lender can also try to recoup some of their money through a forced short sale.
Complicating matters even more is that most of the HELOCs given between 2004 and 2008 went to subprime borrowers. HELOCs made in 2003 are already seeing late payments and rising in number each day.
Also problematic is the jump in interest rates. After 10 years, a borrower with a $30,000 HELOC and a beginning interest rate of 3.5%, could see their monthly repayment jump from approximately $81 to $293, further intensifying the issue.
Federal regulators are warning banks of the real possibility of thousands of HELOC defaults beginning shortly. The Feds are telling the banks they need to start preparing now. Banks are still trying to recover from our last credit crisis and the housing bubble burst, can they withstand another so soon?
Keith A. Gantenbein, Jr. is a licensed, Colorado consumer rights attorney and Denver foreclosure defense attorney, focusing his practice as a foreclosure defense attorney and real estate attorney located in Denver and servicing all of Colorado. His foreclosure defense practice includes Colorado foreclosure help, foreclosure help Denver, foreclosure options Denver, foreclosure prevention, judicial foreclosure, HOA foreclosures, foreclosure assistance, loan modifications, short sales, and all other foreclosure defense legal assistance. His real estate practice includes real estate closings, title issues, lien issues, quiet title, real estate contracts, bankruptcies, mortgage negotiations, lender liability, real estate, civil litigation, evictions, contracts and landlord/tenant. His real estate practice also focuses on his practice as an HOA defense attorney in Colorado, defending homeowners against HOA claims in HOA lawsuits and defense against wrongful covenant enforcement.
If you think you will be facing foreclosure, or are in the foreclosure process, or have had a wrongful foreclosure, contact Colorado foreclosure defense attorney Keith Gantenbein at (303) 618-2122 for a one-hour consultation, where he will discuss your situation and go over all your options with you.
Gantenbein Law Firm practice includes Colorado Foreclosure Defense, Colorado Real Estate Law, Colorado and Federal Tax Law, Colorado Business Law, Credit Dispute and Credit Repair, and Colorado Wills & Trusts. For more information, visit our website: www.gantenbeinlaw.com
Gantenbein Law Firm also specializes in Federal and Colorado Tax Law. If you are facing an IRS tax audit, IRS tax appeal, tax litigation, or need help with an IRS installment plan or IRS offer in compromise, contact our Denver tax attorney immediately at 303-618-2122. Or, visit our Denver tax attorney WEBSITE