Borrowers Face Payment Shock on Home-Equity Lines: LPS Report

Many borrowers who took out home equity lines of credit could soon be facing steep increases in their monthly payments, perhaps setting the stage for a fresh round of mortgage delinquencies, according to a new report from Lender Processing Services.

Home equity loans typically allow borrowers to pay just the interest for 10 years. After that, borrowers must pay both interest and principal unless the loan is restructured.

That's a concern because nearly half of all second-lien home equity lines of credit were originated in 2004, 2005 and 2006, LPS said in a report Monday.

The risk associated with HELOCs has been on the radar of the Office of the Comptroller of the Currency since early last year. In September, Darrin Benhart, the OCC's deputy comptroller for credit and market risk, said delinquencies could rise in 2014 because may HELOCs originated in 2004 are reaching the end of their 10-year draw period and borrowers may no longer have access to the credit lines if banks have not restructuring the loans' terms.

Delinquency rates for HELOCs remain low, but LPS estimates that just 14% of second-lien HELOCs have reached their draw period, leaving "a very large segment of the market at risk of payment increases over the coming years, says Herb Blecher, an LPS senior vice president.

"We could be looking at significant risk to the home equity market over the coming years," Blecher said in a press release.

LPS, a Jacksonville, Fla., data and analytics firm, also reported that overall delinquencies have dropped in the last year. Just 6.3% of all first-lien mortgages were delinquent as of Oct. 31, down from 7.03% a year earlier.

In addition, rising home prices have helped distressed borrowers regain some home equity. As of September, the number of homeowners who are "underwater," on their mortgage, was 11.6%, down from nearly 19% in January.