HELOC Resets: How Lenders Can Minimize Risks and Prevent Losses
Trouble is brewing in the U.S. mortgage market. Many borrowers with a home equity line of credit (HELOC) are about to see their monthly payments jump as they reach a critical point in their loans, known as HELOC resets. Lenders need to start preparing for the upcoming HELOC reset crisis to minimize problems for themselves and for their customers.
The problem with HELOC resets
During the US housing bubble, homeowners across the country took out home equity loans as their properties gained value. When the housing market and economy went south, lenders tightened standards for HELOCs, but the outstanding loans were still on the market.
For years, borrowers were strictly paying back interest on their HELOCs. However, over the next few years, they will be entering the stage of their loans when they need to pay off both interest and loan principal — otherwise known as the “reset point.” Payments could increase by potentially hundreds of dollars a month and will catch many borrowers off guard. This is a serious problem for lenders because homeowners may start defaulting on the new, higher payments after the HELOC resets.
Assess the situation
As the HELOC crisis approaches, lenders need to figure out where they stand. “The most critical part of the HELOC reset situation is assessing a consumer’s ability to repay the loan,” says Rosie Biundo, Senior Product Marketing Director, Equifax Mortgage Services.
Biundo stresses the need for lenders to collect information on consumers, like credit, property and employment/income data, from a qualified firm like Equifax. “This data helps a lender better segment and prioritize their portfolio,” says Biundo. “Once lenders know where they stand, they can start figuring out ways to address the problem.”
Ways to minimize risk/losses
As a lender, you have a few options when it comes to addressing HELOC resets. First, you should try to contact borrowers as soon as possible to warn them about the upcoming payment increases. This will give borrowers more time to prepare, so as to avoid missing payments.
You can also consider readjusting loans for borrowers, for example by extending the interest-only period or by lengthening the entire loan so that monthly payments will be smaller. If homeowners start missing payments, you may want to come up with some sort of payment settlement in an attempt to get some money rather than nothing at all.
The financial impact of HELOC resets will depend on the strength of the economy. If conditions continue to improve, borrowers will have more money to absorb the upcoming hit. If the economy stalls, though, the resets could cause serious trouble in the mortgage industry. Either way, you should do everything in your power to prepare and minimize any potential losses from the HELOC reset crisis.
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