Mortgage Professionals Should be Optimistic About the Future

TheMReport — News and strategies for the evolving mortgage marketplace.

Issue link:

Contents of this Issue


Page 45 of 67

44 | Th e M Rep o RT O r i g i nat i O n S e r v i c i n g a na ly t i c S S e c O n da r y m a r k e t SERVICING the latest economist: HelOc reset Fears Overblown Industry analyst cites four mitigating factors he expects to abate payment shock and delinquencies. a s the mortgage market prepares for bubble-vintage home equity lines of credit (HELOCs) to come out of their draw period, multiple firms have issued warnings about the imminent wave of new HELOC problems. In a new blog post, however, CoreLogic's deputy chief economist, Sam Khater, says the impact from HELOC loan resets will be more like a ripple. Looking back to the inflation of the housing bubble in the mid-2000s, Khater notes that the surge in mortgage debt leading up the crash came partly from a surge in borrowers taking out HELOCs as home prices ran up. Many of those lines were originated as 10-year interest- only loans, meaning millions of borrowers are due for a possible payment shock as their HELOCs switch to fully amortizing loans at a time when the economy is still staggering to normalcy. Including the period from 2004–2006 when the majority of HELOCs were originated, an estimated $190 billion in loans are scheduled to reset over the next few years. While many market watch- ers—including financial regula- tors—are concerned about the risk of default, Khater says the fears of a HELOC-related mort- gage crash are largely unfounded. "While the spike in defaults at the 10-year mark certainly is an issue for those borrowers expe- riencing the reset, from a macro perspective the impact will not be a wave, but small ripples," he writes. To support his claim, Khater points to four major factors he says will mitigate the impact of HELOC payment shocks: 1. The size of the reset pool is relatively small. Looking at the entire $9.9 trillion mort- gage market, $190 billion is a fairly minor segment. 2. Nearly one-quarter of HELOCs are in the first-lien position, meaning there's no other associated debt. 3. One of the major default triggers—negative equity—is improving. By CoreLogic's numbers, the negative equity share for first liens with a home equity loan is 22 percent, well below the 36-percent underwater rate four years ago, and that num- ber continues to improve. Adjusting for first-lien posi- tion and negative equity, the HELOC exposure shrinks from $190 billion to $31 bil- lion, Khater says. 4. The other trigger—unemploy- ment—is also looking better. The national unemployment rate fell below 6 percent as of the government's October estimate, marking a vast improvement with payroll numbers continuing to see ongoing strength. Despite his optimism, Khater does note that HELOCs haven't seen the same kind of regula- tion the rest of the mortgage market has adjusted to in the last year. Of note is the fact that the Consumer Financial Protection Bureau's ability-to-repay rule skipped over HELOCs in its re- strictions on interest-only loans. "This begs the question, why didn't policymakers include a provision for HELOCs given their role in driving up mortgage debt?" Khater writes. "A more sensible approach for HELOC products would be to provide incentives for fully amortizing loans that do not lead to pay- ment shock down the road."

Articles in this issue

Archives of this issue

view archives of TheMReport - Mortgage Professionals Should be Optimistic About the Future