Impact of HELOCs on Housing Future

More debt deflation coming!

from RealEstateChannel.com:

When the housing crisis erupted in early 2007, banks began to curtail their originations of HELOCs.  In spite of this, a study published by Equifax Capital Markets in October 2009 found that 45% of prime borrowers with securitized first mortgage loans that were still current in July 2009 also had a HELOC.  Worse yet, the average outstanding balance on these HELOCs increased steadily from roughly $83,000 in mid-2005 to $118,000 four years later.

It is very likely that a considerable number of financially-strapped HELOC borrowers are using their line of credit to cover the first mortgage payment and avoid default.  Unfortunately, banks have begun to reduce or eliminate the available line of credit in states where home prices have declined substantially.

Last September, Equifax estimated that there were roughly 13.6 million HELOCs outstanding.  Nearly all of them were second or "junior" liens that stood in line behind the first lien holder in the event of a foreclosure.  When added together, they pose a tremendous financial burden for the vast majority of these 13.6 million homeowners.

Several key analyses of so-called "underwater" homeowners do not include these outstanding HELOCs in determining whether a property is underwater or not.  Some do not include the refinancing of first mortgages which we have looked at.  To omit either or both of them will cause a real underestimation of the number of homeowners with negative equity and in serious danger of defaulting.

It is not an exaggeration to say that the massive refinancing undertaken during the bubble years of 2003-2006 is a burden that will probably push back the housing recovery well into the future.