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How Many Underwater Homes Hold Risky Second-liens?

HousingWire.com -

RealtyTrac’s latest report finds that 56% of the 3.3 million Home Equity Lines of Credit potentially resetting with higher, fully amortizing monthly payments from 2015 to 2018 are on properties that are seriously underwater.

A total of 3,262,036 HELOCs with an estimated total balance of $158 billion that originated during the housing price bubble between 2005 and 2008 are still open and scheduled to reset between 2015 and 2018. Of these, 1,834,588 (56%) are on residential properties that are seriously underwater, meaning the combined loan to value ratio of all outstanding loans secured by the property is 125% or higher.

For the report, RealtyTrac analyzed open HELOCs originated between 2005 and 2008 with the assumption that these loans will reset with fully amortizing monthly payments after a 10-year period of interest-only payments. RealtyTrac used average HELOC utilization rates from the New York Federal Reserve and the prime interest rate of 3.25% to calculate the outstanding balance of the loans and to calculate the interest-only and fully amortizing monthly payments.

States with most HELOC resets are California, Florida, Illinois, Texas and New Jersey

With 645,872 HELOCs scheduled to reset over the next four years, California led the way among the states in terms of sheer volume of resetting HELOCs. A total of 423,706 (66%) of those resetting HELOCs in California are on homes still seriously underwater, and the average monthly payment increase on HELOCs resetting in California over the next four years is $215. 

“We are entering the first of a multi-year swing where we will encounter an elevated level of HELOCs with resetting loan payments on loans that were feasible during the boom. Many of these auto resets are moving from interest only to principle and interest payments and drastically increasing homeowner monthly liabilities, to the extent that they need to sell to get out from under the new payment.

Florida had the second highest number among all states of resetting HELOCs over the next four years, with 513,229, followed by Illinois with 158,199. In both Florida and Illinois, seriously underwater homes backed 71% of the resetting HELOCs over the next four years.

 “Low rates, rising prices and an improving economy have taken the steam out of the HELOC reset pressure cooker,” said Mike Pappas, CEO and president of the Keyes Company, covering the South Florida market. “In 2014, 1% of our South Florida housing stock saw their HELOCs begin to amortize and paid — on average — a $162 per month increase in their monthly payments. Over the next four years 7% of our property owners will see a similar increase and as long as interest rates stay low and we continue to experience rising prices there should be no major impact on the market.”

Texas had the fourth highest number of resetting HELOCs with 158,017 over the next four years — 36% of which were on seriously underwater homes, and New Jersey had the fifth highest number of resetting HELOCs with 145,312 over the next four years — 47% of which were on seriously underwater homes.

Other states among the top 10 for resetting HELOCs over the next four years were Ohio (136,327), New York (132,492), Arizona (122,749), Pennsylvania (110,493), and Washington (110,372).

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