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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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Thu, 11/14/2013 - 00:20 | 4153034 LetThemEatRand
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.  

Thu, 11/14/2013 - 00:34 | 4153063 Harbanger
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.

Thu, 11/14/2013 - 00:46 | 4153095 LetThemEatRand
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.

Thu, 11/14/2013 - 00:53 | 4153110 Harbanger
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.

Thu, 11/14/2013 - 01:01 | 4153119 LetThemEatRand
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.

Thu, 11/14/2013 - 01:06 | 4153125 Harbanger
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.

Thu, 11/14/2013 - 01:16 | 4153130 LetThemEatRand
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?

Thu, 11/14/2013 - 01:20 | 4153147 wisehiney
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.

Thu, 11/14/2013 - 01:27 | 4153157 LetThemEatRand
LetThemEatRand's picture

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

Thu, 11/14/2013 - 06:55 | 4153315 negative rates
negative rates's picture

This is too easy. Just refinance me like always, you get a fat refinancing fee, I get some extra cash from the equity, and worry about the fractional increase in rates in a few years after I spent the equity money, and start the whole process all over again. We been doin it that way for decades, don't see no reason the change things now.

Thu, 11/14/2013 - 10:06 | 4153585 centerline
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.

Thu, 11/14/2013 - 01:23 | 4153152 Harbanger
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.

Thu, 11/14/2013 - 09:00 | 4153453 Race Car Driver
Race Car Driver's picture

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

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

Thu, 11/14/2013 - 10:15 | 4153615 screw face
screw face's picture

...SHORT G. E.

Thu, 11/14/2013 - 01:16 | 4153142 wisehiney
wisehiney's picture

From your keyboard to God's screen.

Thu, 11/14/2013 - 11:54 | 4154087 Omen IV
Omen IV's picture

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

Chase has over $95 Billion of this paper

Thu, 11/14/2013 - 00:55 | 4153111 ghengis86
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

Thu, 11/14/2013 - 02:03 | 4153179 ronaldawg
ronaldawg's picture

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

Thu, 11/14/2013 - 02:25 | 4153188 LetThemEatRand
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.

Thu, 11/14/2013 - 04:18 | 4153257 gobsmack
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.

Thu, 11/14/2013 - 00:20 | 4153035 Seasmoke
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 !!

 

 

Thu, 11/14/2013 - 10:30 | 4153673 Jumbotron
Jumbotron's picture

Russian politician predicts dollar collapse in 2017.

http://www.washingtontimes.com/news/2013/nov/13/bill-would-outlaw-us-dol...

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.

Thu, 11/14/2013 - 15:22 | 4155137 novictim
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.

Thu, 11/14/2013 - 00:23 | 4153049 ebworthen
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.

Thu, 11/14/2013 - 00:24 | 4153050 mayhem_korner
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. 

Thu, 11/14/2013 - 00:25 | 4153052 worldofdebt
worldofdebt's picture

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

See the Hilarious Music Video "WORLD OF DEBT":

http://www.youtube.com/watch?v=99xsqxzJnXs

AND... JIM CRAMER'S TERRIBLE STOCK PICKS--MUST SEE!! 

https://www.youtube.com/watch?v=Lhwplunz7-I

Thu, 11/14/2013 - 06:40 | 4153307 Diplodicus Rex
Diplodicus Rex's picture

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

Thu, 11/14/2013 - 00:29 | 4153066 kchrisc
kchrisc's picture

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

Thu, 11/14/2013 - 00:29 | 4153067 Hulk
Hulk's picture

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

Thu, 11/14/2013 - 12:05 | 4154162 Jumbotron
Jumbotron's picture

Until it does.

Thu, 11/14/2013 - 15:07 | 4155078 novictim
novictim's picture

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

Thu, 11/14/2013 - 00:30 | 4153070 mayhem_korner
mayhem_korner's picture

 

 

Repaying loans is so passe...

Thu, 11/14/2013 - 03:00 | 4153217 Zero Point
Zero Point's picture

Of course you have to pay your loans.

By taking out another loan.

Simple.

Thu, 11/14/2013 - 10:40 | 4153718 Chaos_Theory
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!

Thu, 11/14/2013 - 00:35 | 4153087 Muppet
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.

Thu, 11/14/2013 - 00:48 | 4153105 disabledvet
disabledvet's picture

was this the third of the "trillion dollar triad" of securitized debt back in 2008? that shit did reset to zero...as 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.

Thu, 11/14/2013 - 03:24 | 4153227 zebrasquid
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.

Thu, 11/14/2013 - 00:50 | 4153091 RaceToTheBottom
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.

 

Thu, 11/14/2013 - 00:50 | 4153107 disabledvet
disabledvet's picture

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

Thu, 11/14/2013 - 02:58 | 4153215 Offthebeach
Offthebeach's picture

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

Thu, 11/14/2013 - 01:01 | 4153117 wisehiney
wisehiney's picture

Mama told me not to come.

Thu, 11/14/2013 - 01:06 | 4153124 Seasmoke
Seasmoke's picture

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

Thu, 11/14/2013 - 01:15 | 4153141 wisehiney
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.

Thu, 11/14/2013 - 10:26 | 4153653 HardAssets
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.

 

http://www.monticello.org/site/jefferson/private-banks-quotation

Thu, 11/14/2013 - 10:58 | 4153782 Harry Dong
Harry Dong's picture

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

Thu, 11/14/2013 - 01:11 | 4153133 wisehiney
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.

Thu, 11/14/2013 - 01:13 | 4153136 wisehiney
Thu, 11/14/2013 - 01:26 | 4153156 glenlloyd
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.

Thu, 11/14/2013 - 08:29 | 4153393 bunnyswanson
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.

Thu, 11/14/2013 - 21:50 | 4156359 Blankenstein
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?   

Thu, 11/14/2013 - 09:11 | 4153477 Race Car Driver
Race Car Driver's picture

You must be ... old.

Thu, 11/14/2013 - 03:42 | 4153231 zebrasquid
zebrasquid's picture

Lots of people at the top took on interest only 10 year mortgages, too, and when the principal payments begin lots of monthly payments will be going up 30% or more (and that extra payment is not tax deductible)

Thu, 11/14/2013 - 05:36 | 4153281 new game
new game's picture

I HAVE ZERO COMPASSION FOR FUCKING IDIOTS THAT BARROW MONEY-PERIOD...

FUCKING RETATRDED VANITY SEEKING IDIOTS-LOOSERS...

Thu, 11/14/2013 - 23:10 | 4156580 RafterManFMJ
RafterManFMJ's picture

I took out an interest-only 9 dollar loan to buy a dictionary; perhaps you should do the same.

Thu, 11/14/2013 - 03:48 | 4153241 Dre4dwolf
Dre4dwolf's picture

One would almost say that mortages and loans are designed to get harder and harder to pay as time goes on as a ploy to milk you for all your worth and then take your stuff.

One would almost say that.

And one would probably be right.

 

"Pay the fucking mortgage for 29 years, you fucking worthless slave, hahahaha wait till the XXXXX term in the contract kicks in and I steal your fucking house on the 30th year you fucking Muppet"

All of the sudden that 400,000$ loan that they created out of thin air sucked 3 million dollars and a house and the owners first born child out of him and kicked him to the curb.

Thu, 11/14/2013 - 03:47 | 4153242 TyrannoSoros Wrecks
TyrannoSoros Wrecks's picture

Her name is Amy Crews Cutts? I mean really?

Thu, 11/14/2013 - 09:34 | 4153516 Shadow750
Shadow750's picture

Looks like someone is going to get a hair cut here somewhere...

Thu, 11/14/2013 - 23:12 | 4156583 RafterManFMJ
RafterManFMJ's picture

You'll find most super villains have absurd names.

Thu, 11/14/2013 - 03:59 | 4153251 q99x2
q99x2's picture

This is hopeful. Someone anticipates there will be a 2015.

Yaaaaaa.

Thu, 11/14/2013 - 04:35 | 4153265 Double.Eagle.Gold
Double.Eagle.Gold's picture

Hell, anything under $100T is meaningless anymore...

Thu, 11/14/2013 - 07:44 | 4153342 itstippy
itstippy's picture

The numbers are puny.  $30B reset, $53B reset - peanuts to the big banks.  The Fed is pouring $85B PER MONTH into the big bank financial system, and the big banks are already sitting on $2T in excess reserves.  No earthquake to the financial system looming here.

The clowns on Main Street who took out these idiotic 2nd & 3rd mortgages & HELOCs are in a pickle though.  They might lose all their "stuff". 

Thu, 11/14/2013 - 10:26 | 4153661 screw face
screw face's picture

Puny indeed...........never underestimate the butterfly affect.

 

...remember the pacific rim is toast on a stick bank on it.

Thu, 11/14/2013 - 06:38 | 4153305 goldenbuddha454
goldenbuddha454's picture

Not to worry, O will put forth TARP 18 by then and all is well!

Thu, 11/14/2013 - 08:37 | 4153402 Professor Fate
Professor Fate's picture

And main stream economists get their shorts in a knot, warning of recession when gasoline spikes up a buck and costing the average family an extra $50 a month.  Wait till they get a dose of ObummerCare's effect.  Add in some mortgage resets and the effect of "real" inflation on food, some SNAP haircuts, etc. and I say by next year a large piece of guano hits the fan. Here comes the next real estate crash.

Fate the Magnificent
"Push the Button, Max" 

Thu, 11/14/2013 - 10:23 | 4153622 shovelhead
shovelhead's picture

I have as much sympathy for these people as I do for people who get drunk and drive down the wrong side of the freeway at night with their lights off.

Part of being an adult is to not act like a child being offered candy by a stranger. That stranger is always bereft of good intentions.

Beware 'Innovative financial products'. They are only innovative to you. Somebody has already run that scam before somewhere.

You only gamble with what you can afford to lose. Simple as that.

 

 

Thu, 11/14/2013 - 10:50 | 4153754 Chaos_Theory
Chaos_Theory's picture

Funny...the free candy from strangers allegory made me immediately think of one of those demotivators with a crappy red van with "free candy" written in white paint on the side with the caption "Pussy" in bold, and "come on, this guy looks legit" under that.   Then I imagined a Banzai version with the Pres in the driver seat smilling at us, and "free healthcare" written in bold with Obamacare bumber stickers everywhere. 

Thu, 11/14/2013 - 11:23 | 4153882 Relayer74
Relayer74's picture

But... aren't you a Fortunate Son?

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