A growing number of mortgage professionals are concerned that billions of dollars in home equity credit lines that were extended during the housing boom now could be on the brink of default. That is because the credit lines -- essentially second mortgages with floating rates and flexible withdrawal terms -- feature mandatory "resets" that require borrowers to begin paying both principal and interest on their balances after paying only interest for the first 10 years.
The difference between the interest-only and reset payments on these credit lines could be as much as $600 or more a month in some cases. Some borrowers will not be able to afford or opt not to make the bigger payments -- in which case, the bank that owns the note can demand full payment and foreclose on the home if there is sufficient equity.
Approximately $30 billion in home equity lines are scheduled for resets in 2014, another $53 billion in 2015, and a whopping $111 billion in 2018. Equifax chief economist Amy Crews Cutts cautions that refinancings often will not be possible, because many homeowners will not qualify under the tighter mortgage rules set to take effect in January. Either that or the combined first and second mortgages may be more than the value of the residence. In addition, interest rates are likely to rise as the Federal Reserve tapers its purchases of Treasury and mortgage-backed securities.