Heavens to Betsy and holy cow!
According to published reports in HousingWire and other media, the reset risk is worse than expected for underwater HELOCs, according to RealtyTrac. What a shocker… to some. While this “news” is surprising to some analysts, anyone who has been following my articles over the past year knows that it does not surprise this housing industry analyst.
In Trey Garrison’s piece, “How many underwater homes hold risky second-liens?”, he notes that RealtyTrac’s most recent report found that 56% of the 3.3 million Home Equity Lines of Credit potentially resetting with higher, fully amortizing monthly payments from this year to 2018 are on properties that are seriously underwater, and the combined loan to value ratio of all outstanding loans secured by property is 125% or even higher.
Garrison quoted Daren Blomquist, vice president at RealtyTrac, as stating that homes purchased or refinanced near the peak of the housing bubble between 2005 and 2008 are much more likely to still be underwater despite the [artificially-created, my words] strong recovery in home prices over the past three years. And he went on to add that many homeowners with HELOCs who have positive equity likely already refinanced to mitigate the payment shock of a now estimated increase of $146 per month as a result of resetting. But, this is an option not readily available in many areas of the country for homeowners still underwater.
These new reports indicate that we are most likely entering a period of higher risk over the next four years as it relates to resetting these “bubble-era” HELOCs. This is especially troubling given noticeably slowing home price appreciation in many markets across America that offers underwater homeowners less optimism for recovering their equity in the short run.
In other news, as reported recently by several industry trade publications and newspapers, including HousingWire, of course, BBVA Compass is introducing a new loan program that will allow borrowers to put down even less than the 3% down payment mortgage programs to be offered by Fannie Mae and Freddie Mac. This move and others like it, while laudable, will no doubt ensure increasing default rates.
BBVA Compass announced the start of a new program, which they call Home Ownership Made Easier (HOME), which is designed to help low- and moderate-income borrowers become homeowners by helping them overcome the hurdle of having to save up enough money for a down payment.
According to BBVA executives, in the HOME program, qualifying borrowers will be eligible to finance 100% of the home’s value. Not only that, but BBVA says it will also contribute up to $4,500 toward certain closing costs.
Many believe this will also mean that some home buyers will purchase homes that they might not be able to afford in the long run. These borrowers will have very little skin in the game when defaults lead to foreclosure. Sound familiar?
One would hope that stringent underwriting guidelines and requirements will be in place to minimize potential defaults. But, if one cannot save up even a 3% down payment it is conceivable that they are one or two paychecks from financial disaster.
If this isn’t enough to persuade you that increased defaults are on the horizon, in 2010 over 40% of all mortgages were financed with FHA backing and in the years since the number of FHA loans has skyrocketed. It can be argued that many of these loans are riskier. Some have very low down payments or are adjustable-rate loans. Higher risk loans simply means more people have received mortgages on homes they cannot afford. That translates into more and more loans going into default.
Additionally, millions of loans that went through the Home Affordable Modification Program are soon to be recast. Some economists are predicting that 30% or more of those loans will go back into default.
While many analysts and pundits in and around the housing and mortgage industries continue to be “surprised” by mounting reports that indicate we are on the verge of another increase in mortgage defaults, you can be assured that I won’t be among them.