ke The OCC's latest
Semiannual Risk Perspective says that out of the nine largest home equity lenders face a big problem
from 2015 to 2017—the resetting of $131 billiion in home equity
lines of credit (HELOC). When a HELOC comes due, it may end with a balloon
payment. It may begin amortizing, which can drive up monthly payments.
Normally, this would not be a major problem. Homeowners would refinance
their HELOCs and all would be well. Sure, a big surge like this would
present a problem of scale/logistics, but it would be manageable.
The problem facing banks right now is that, although home prices have rebounded
somewhat, the market is nowhere it needs to be. Many borrowers remain
underwater. Many have unacceptably large debt loads; getting a refinance
from anyone will be problematic.
What does this mean for borrowers? Some may end up in foreclosure. For
HELOCs that end in a balloon payment, failure to make that payment can
be a breach that could lead to a foreclosure action. For HELOCs that begin
to amortize, the sticker shock alone could also cause borrowers to default.
With no readily available refis, homeowners may be in a tough spot.
However, for those in a bind, a Chapter 13 bankruptcy may be a viable option
for relief. In a Chapter 13, it is possible to restructure or, in some
cases, completely remove mortgages from a home. If the HELOC is partially
supported by the home's value, it is possible to "cram down"
the loan to the fair market value of the home. The remaining portion becomes
an "unsecured" debt, which is treated differently in a Chapter
13 bankruptcy—many filers may only pay back a portion of the unsecured
amount. However, this is only available on investment properties. It's
not possible to cram down a mortgage on a principal residence.
For a principal residence, it may be possible to strip liens (mortgages)
from a home and make them wholly unsecured debts. If the home's value
cannot support the value of the HELOC, then it is possible to strip the
HELOC and repay it as an unsecured debt. For example, a home is worth
$200,000. It has a first mortgage at $200,000 and a second HELOC at $50,000.
The HELOC is not supported by the home's value. It can be stripped.