Beware The Looming "Wave Of Disaster" From Home Equity Payment Resets

Tyler Durden's picture

Submitted by Michael Krieger of Liberty Blitzkrieg blog,

Of all the screwed up, misallocated parts of the U.S. economy, the housing market continues to be one of the biggest potential train wrecks. While the extent of the insanity in residential real estate should be clear following the article I published yesterday, there are other potential problems just on the horizon.

One of these was written about over the weekend in the LA Times. In a nutshell, the next several years will start to see principal payments added to interest only payments on a large amount of second mortgages taken out during the boom years. The estimate is that $30 billion in home equity lines will reset next year, $53 billion in 2015, and then ultimately soaring to $111 billion in 2018.

From the LA Times:

Some mortgage and credit experts worry that billions of dollars of home equity credit lines that were extended a decade ago during the housing boom could be heading for big trouble soon, creating a new wave of defaults for banks and homeowners.


That’s because these credit lines, which are second mortgages with floating rates and flexible withdrawal terms, carry mandatory “resets” requiring borrowers to begin paying both principal and interest on their balances after 10 years. During the initial 10-year draw period, only interest payments are required.


But the difference between the interest-only and reset payments on these credit lines can be substantial — $500 to $600 or more per month in some cases.


According to federal financial regulators, about $30 billion in home equity lines dating to 2004 are due for resets next year, $53 billion the following year and a staggering $111 billion in 2018. Amy Crews Cutts, chief economist for Equifax, one of the three national credit bureaus, calls this a looming “wave of disaster” because large numbers of borrowers will be unable to handle the higher payments. This will force banks to either foreclose, refinance the borrower or modify their loans.


Financial regulators, including the comptroller of the currency, are aware of the coming bulge in high-risk resets and have been urging the biggest banks to set aside extra reserves for possible losses. Last month, Citigroup said it was increasing reserves on its nearly $20 billion in home equity lines and acknowledged that the reset payment shocks for borrowers could be a major challenge.

Full article here.

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LetThemEatRand's picture

They tried to reflate the housing bubble to save themselves, the banks. from this coming tsunami.  They failed because they forgot one simple thing -- inflating home values by holding back foreclosures (there are millions of foreclosed homes being held off the market), forcing investors seeking yield to invest in real estate (a huge percentage of home purchases the last few years were investors, not people looking for housing), and dropping rates to generational lows does not help when the golden goose middle class has no disposable income because the middle class jobs have been sent to China and elsewhere.  So that's why they, the Fed, decided on QEinfinity.  Convert the bad loans into Fed Balance sheet, which is ultimately owed by us, the taxpayer.  

Harbanger's picture

Read the Article, Principal payments are being added to interest only payments (equity lines of credit) on second mortgages taken out during the boom years.  Translation- Equity lines are being converted into long term mortgages, that spells "capital control".  Prepare for manipulated deflation.

LetThemEatRand's picture

Equity lines are second and third mortgages.  They were already long-term mortgages on top of original mortgages.   The first mortgage holder has priority in the event of a foreclosure by one of the second- or third-mortgage holders.  The Fed has been buying first mortgages.  Most of the second and thirds are owned by smaller banks.   The plan is/was to reflate just enough to be able to sell the properties at sufficient value to cover the first.  The problem is that once they start selling these properties into the market, they won't even cover the first.  The second and third mortgage holders will receive nothing.  

The solution is more QE.

Harbanger's picture

The fed buys all MBS regardless.  When the banks want to swap your equity line into a long term mortgage, it's because they anticipate deflation in asset prices and equity lines of credit are on their way out.

LetThemEatRand's picture

The Fed buys the MBS it wants to buy, not all.  They want the smaller banks that hold the seconds and thirds to fail.  But I agree with your deflation argument in the sense that the Fed will allow deflation when it suits them.

Harbanger's picture

I hate it when you agree with me.  The planners will not only allow deflation, they will force it with capital controls.

LetThemEatRand's picture

They already have capital controls.  What do you think QE is?  And corporate tax rates that are effectively zero while the middle class pays more with less income?  And "they" are the guys to whom you want to hand the keys.  Remember trickle down?  Free trade?  Welcome to the result.  Shrinking middle class, growing wealth among a smaller group of haves, more have-nots sucking off the trough, in fighting among the population deciding who to blame.  Unions?  Minorities?  Liberals?  Smell the banker urine trickling down your ideological face yet?

wisehiney's picture

The soon to be revealed illusion is that the bastards have control at all. They must allow deflation just before the "day the music (dollar) died". So bye bye, Miss American Pie. Be ready like when you were in the fifth grade stealing third base.

LetThemEatRand's picture

They are not buying billions of hollow points and militarizing the police because they think it will end well (for us).  

centerline's picture

They know that at some point they are going to lose control.  And they have a better estimate of the timing than we do.

Harbanger's picture

Whom I want to hand the keys to?  Like I control the keys?  Actually the global bankers have been testing reaction to capital controls.  The sheep seem to like it so far, you know, get the rich meme, it works for the elite in power.  They always get a heads up and skip the haircuts.  But now we're back to talking nonsense.  Later Lola, its bedtime for me.

Race Car Driver's picture

> Smell the banker urine trickling down your ideological face yet?

No ... but at least it feels warm and familiar.

wisehiney's picture

From your keyboard to God's screen.

Omen IV's picture

"Most of the second and thirds are owned by smaller banks"

Chase has over $95 Billion of this paper

ghengis86's picture

Juts like fishing

Lure the rubes with cheap 'money', get them to bite on that too-good-to-be true HELOC rate and ink the contract, let some line play out for a couples years to allow their debt to really sink in deep (and not scare the rest of the sheep away), and then BAM!!! Out of nowhere you set the hook by yanking those payments up real hard.

Now, they got you hooked and there are two options. One, you try to resist but never let go of the debt hooks because you think you can find a way to keep your shiny toys while simultaneously ridding yourself of the debt. It ain't gonna happen no matter how many times you try to refinance or avoid a ding to your precious credit rating. So you stick it out in the hopes that one day, you'll be free of the debt burden. The reality is that they've got an easily controlable debt serf that can be corralled into doing anything within the 'approved' debt system until their financial freedom is essentially killed.

Or two, they can rip out the debt hook themselves, but its painful and messy and will leave a scar. But then they are free to do anything.

It seems like around me, people can't give up their lifestyle, don't want to downsize, can't sell because they're upside down and there are no buyers

ronaldawg's picture

Does that mean the igits doing the massive house flipping in SoCal will get away Scot free?

LetThemEatRand's picture

It is ironic that so-called socialist/marxist CA is one of the last places where a guy who didn't inherit millions could still make them.  Don't you think?  Well, don't you? Must be all the oil.

gobsmack's picture

I reset my second early to fix a low 3% rate so I didn't get socked with a higher rate later. It was a hell of a lot more than $500 to $600 extra as my payments went from ~700 to ~2150. Most won't be able to handle it I fear.

Seasmoke's picture

They can go up $5000 a month, however HELOC on upside down mortgages = ZERO......and the shame of foreclosure is long gone motherfuckers !!



Jumbotron's picture

Russian politician predicts dollar collapse in 2017.

So.....2018 for the big reset.....Peak Medicaid and Social Security busts by 2020.....Peak Oil a bonafied reality to all from 2020 on.....On the books national debt 25+ Trillion by 2020.....

Then throw in a Black Swan or two any where from now until then....

Yep.....collapse is coming....sure as shit.

Get your gardens and solar power ready.

novictim's picture

Global Climate change is not a Black Swan to anyone paying attention and unplugged from the propaganda mills.


Hunger is likely going to reach out and touch every last one of us.  

The wealthy are going to find they are not wealthy enough by at least a one way ticket off this rock.  There is no where to run and hide.

ebworthen's picture

Well of course, this is part of the plan, the same plan Greedspun employed 2001-2006.

Get people holding two pair Jacks and Deuces to go all in, as you sit holding the Ace/King Full House given to you by the Banker Dealer for a kickback of the Pot.

Does not surprise me in the least.

Same Shit Different Decade.

mayhem_korner's picture



Maybe someone should pair up these interest-only-paying, second-mortgage-holders with the new wave of mom & pop subprime lenders. 

worldofdebt's picture

It's just a WORLD OF DEBT!!! So sad... 

See the Hilarious Music Video "WORLD OF DEBT":


Diplodicus Rex's picture

WordofDebt......brought to you by the same writers of Fortran really is a lost art.

kchrisc's picture

"It's not the fall that kills you, it's the sudden stop."

Hulk's picture

LOL, amazing how this shit just never stops...

novictim's picture

It won't stop this's set to continue to infinity. Because this time it is different.

mayhem_korner's picture



Repaying loans is so passe...

Zero Point's picture

Of course you have to pay your loans.

By taking out another loan.


Chaos_Theory's picture

It's not increasing your debt to raise your debt limit.  You have to pay back the bills you already owe...with new debt!  I know this pearl of wisdom because the President said it.  And by golly he's a nice guy and totally believable!

Muppet's picture

Come on, everyone knows HELOCs don't need to be repaid.  They're secondary lien holders and they've gotten use to non-repayment without recourse.

disabledvet's picture

was this the third of the "trillion dollar triad" of securitized debt back in 2008? that shit did reset to a consequence I'm not sure how severe the hit will truly be unlike 2008 where the numbers simply couldn't be quantified they were so huge. plus with "leaning to love the bubble" (which has clearly returned to SoCal) a lot of these motgages might be getting paid for. I did see Wells Fargo had some really bad numbers though. I certainly don't see a "Bank of California" coming anytime soon. Not true with Texas though. They might be able to pull it off.

zebrasquid's picture

HELOCs generally are non-recourse only if the proceeds were used towards home improvements. Full recourse if you bought a boat or went to Tahiti.

RaceToTheBottom's picture

The sign of something really bad is that Accounting rules are still debased.  WS has made billions in bonuses and salaries and nothing has been shored up in the markeplace to the level to be able to reinstate Accounting rules. 

Indeed things have gotten worse.

The longer Accounting rules are debased the closer we get to Russia and third world corruption.  We are institutionalizing it. 

I cannot publicly state the hatred I have for WS Banksters without getting on FBI/NSA databases.  In a few years they have accelerated the wrecking of a country.


disabledvet's picture

Jury is still out on this one but I think they might have stabbed themselves in the back here.

Offthebeach's picture

All commrads are in the state security list.
The sheeple are always watched.

wisehiney's picture

Mama told me not to come.

Seasmoke's picture

First Inflate, then Deflate.....Damn that Thomas Jefferson was one smart terrorist.

wisehiney's picture

His uncle Field Jefferson's children that died very young are buried along the ridge from me. Forgotten to all history I believe, but I will leave a record.

HardAssets's picture

"First Inflate, then Deflate.....Damn that Thomas Jefferson was one smart terrorist."

Well, Thomas Jefferson never really said that often cited 'quote'. The terms 'inflation' and 'deflation' weren't used in regard to economics during his time. I loved that 'quote' and used it often. I even have it on a coffee cup. But, I no longer repeat it now.  (With so much b.s. tossed out there by TPTB its important not to do this ourselves as much as possible.)  Sorry to wreck a great 'quote' for you. I sure liked it too.

Thomas Jefferson did warn about debt and banks. He was our greatest American president IMO.

Harry Dong's picture

Thank you. If you didn't say something I would have. 

wisehiney's picture

Krieger, just cause there is a crater on the moon named Krieger, does'nt mean that it is on the dark side.

glenlloyd's picture

But they had to borrow that money so they could finance their new Suburban, or Yukon, or Excursion (that won't fit in the garage).

People need to quit living beyond their means...seriously folks, all these outward signs of prosperity are nothing but a facade at best. Really nothing but a sham.

bunnyswanson's picture

Home equity was used many times to start a business.  Consider the small shops, auto repair, hair salons, restaurants, computer repair shops, boutiques.  Never met a soul who took out HE to purchase a car.  Come on.  Desperae times called for deperate measures (illness another reason, college costs, emergency fun or buying time)...Many did, especially if person just lost their job or their field of work left the soil and hoped to create a business with some talent or interest say on Amazon.

Blankenstein's picture

Where were you from 2001 -2006?  How do you think everyone bought those vacation homes, $50,000 SUVs and jet-setted around the world?