For 2013, things started to look up for the mortgage industry. Interest rates hit record lows, causing more individuals to consider purchasing a home. At the same time, prices began to rise reasonably. Together, these signs pointed to a slow and steady yet well-managed recovery.
However, Reuters published an expose of housing bubble-era practices that have potential to damage the industry yet again. While not concerning loans directly, a potential second bubble may result from home equity lines of credit issued between 2003 and 2007 – advertised in the same way and at the same time as subprime loans.
Although the U.S. Office of the Comptroller of the Currency foreshadowed these risks as early as spring 2012, the impending threat is expected to unfold over the next four years. Why now? Many homeowners, who had used their properties as collateral 10 years ago, may now suddenly owe larger payments – in some cases, Reuters points out, tripling, with even more increases from the Federal Reserve. The amount lost has potential to reach $221 billion, with banks suffering 90-percent losses.
Many home equity lines of credit were taken out as second mortgages, although others may have been put toward a car or used for a vacation. However, as Reuters indicates, the ripple effect will only be determined once borrowers show how well they can pay down the principal, along with the interest.
What’s different this time around is banks’ attitude. Rather than resort to foreclosure, especially as some borrowers may have lost their homes already, Reuters reports more are now likely to set up a workout program, revise terms to extend the interest-only period, or give the borrower a longer period to repay the principal.
With the Ability to Pay and Qualified Mortgage rules going into effect in January 2014 after a year of low interest and stricter qualifications, could home equity credit lines end up undoing all of the housing market’s positive gains?