Watkins White Paper | 2015 | The Emerging HELOC Crisis

The HELOC loans that were originated over the past decade are now approaching maturity and the point in time at which these loans will commence repayment of principal, commonly referred to as “reset” or “end-of-draw.” Following the “end of draw” period, Borrowers are no longer able to draw against their line of credit. In addition, borrowers will be required to begin repayment principal and interest or repay the entire principal balance. As a result, many borrowers are very likely to face “payment shock” from an increase in combined principal and interest payments, a reduction in home value, and a potential inability to refinance under revised underwriting guidelines; and thus may not have the ability to repay the loan. How lenders deal with the transition in their HELOC portfolios will greatly influence the outcome of this potential crisis.