Fears of HELOC Defaults Go Unrealized

October 2, 2017

When homeowners began taking out more home equity lines of credit, economists warned that the number of defaults may rise as borrowers face higher monthly payments. But so far, fears surrounding a HELOC boom haven’t been realized.

From 2000 to 2006, when home prices were rapidly increasing in the run-up to the housing collapse, many homeowners took out HELOCs, initially being required only to pay interest on outstanding balances for a set period. But when the draw period ended on the HELOCs, many borrowers then faced an amortizing loan. They then had to pay a fixed amount each month based on the outstanding balance at the end of the draw period. The monthly payments rose, resulting in what some call “payment shock.”

However, many HELOC borrowers paid off and closed their loans years before the end of the draw period, according to CoreLogic data on HELOCs over the past 10 years. About 50 percent to 70 percent of HELOC accounts opened between 2003 and 2007 were closed more than four years before the end of the draw period.

“The decline in home prices after 2007, and the potential for rising interest rates, resulted in a fear that a substantial number of HELOC borrowers would default on the loans upon reaching the end of their draw period,” researchers note on the CoreLogic Insights blog. “Rising interest rates could increase the payment shock at the end of the draw period, while a loss of home equity could trap borrowers in loans. However, robust home price appreciation in recent years and continued low interest rates have mitigated default risks for recent cohorts reaching the end of the draw.”

Source: “Home Equity Lines of Credit,” CoreLogic Insights Blog (Sept. 27, 2017)