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Borrowers beware of upcoming home-equity resets
WASHINGTON (3/27/14)--Before the housing market crumbled in 2008, home prices soared, and credit came fast and cheap.

With consumer confidence high, many tapped into their home's equity to reap the benefits of paying interest-only on those second mortgages for 10 years.

That decade has come and gone, however, and the interest-only payments tied to those home-equity loans have fled along with it.

Reports have been rolling in that home-equity loans, en masse, will begin to reset this year, a mechanism that will cut off the interest-only payment terms and force borrowers to start paying down the principal loan they received 10 years ago, plus interest, from here on out.

Analysts say this could push monthly payments several hundreds of dollars higher for those consumers still carrying decade-old home-equity lines of credit.   

"We've really been trying to get the word out that this is coming," said Bob Piepergerdes, director of retail credit risk for the Office of the Comptroller for the Currency ( MarketWatch March 26). "Our message is this: (Consumers) shouldn't wait to start addressing it."

The comptroller for the currency office forecasts that $171 billion in home-equity loans held by the biggest banks will reset over the next four years, compared to just $28 billion in the previous four.

Credit unions experienced the highest growth rates in home-equity loans in 2005 and 2006, at roughly 25%, according to the Credit Union National Association's Economics and Statistics Department. If carrying traditional terms, those loans will reset in the coming two years as well.

With payments climbing anywhere from $300 to $600 higher than current levels, borrowers may have a difficult time making up the difference, leaving them vulnerable to default and foreclosure.

In the Los Angeles Times in November, Amy Crews Cutts, chief economist for Equifax, called the situation a looming "wave of disaster," as large numbers of borrowers won't be able to make the higher payments.

Meanwhile, waiting to approach lenders until the end of the interest-only period on these home-equity lines would not be prudent, advisers say. Instead, consumers should ask whether they can roll their second mortgages in with their first--which often feature lower interest rates--refinance, or opt for a forbearance plan that can modify these loans ( The New York Times Feb. 6).

"Borrowers should raise their hand very early and expect to be helped," Allen J. Jones, managing direction of Washington-based RiskSpan, told The New York Times.


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