HELOC Resets Loom With Few Options

A wave of HELOC resets are looming on the horizon and the Treasury department has few options to help homeowners who might be left struggling to pay their bills. The programs already in place have had little success and the Treasurer’s authority to create/fund new homeowner assistance programs (under the Troubled Asset Relief Program) expired several years ago.

These HELOC resets are expected to accelerate this year and peak in 2017, which could cause borrowers to default because the monthly payments will jump as these second liens become fully amortizing.

Treasury created a second-lien modification program, known as 2MP, in 2009. At this point, “we could make small changes to help more 2MP borrowers or provide more relief if a HELOC is in a second-lien position,” McArdle says. They can’t, however, create an entirely new program.

So far, servicers have completed nearly 130,000 second-lien modifications under 2MP, including nearly 34,000 where the second lien was extinguished.
Any further relief provided under 2MP will have to come through the 15 companies already participating. “At this point of the program, we can’t add more servicers,” McArdle says.

In September, Treasury expanded the 2MP program so that second liens tied to loans guaranteed by Fannie Mae or Freddie Mac could be modified as part of a GSE standard loan modification. Over 2,600 second liens have been modified this way since then.

Under Treasury’s Hardest Hit program, states can use Tarp funds for modifying or extinguishing HELOCs and other second liens. The Treasury allotted $60 million to five states to fund second lien programs. Of that, $20 million has already been spent on second-lien reductions.

Ten million dollars went to a California program administered by the nonprofit Community HousingWorks, based in San Diego.

California’s Community 2nd Mortgage Principal Reduction Program provides up to $50,000 per customer to reduce or extinguish second liens and HELOCs. But it requires a 60% match from the holder of the second lien.

On a $50,000 HELOC, “the C2MPRP will provide up to 40% or $20,000 and the participating lender/investors would forgive 60% or $30, 000,” according to guidelines issued by the California Housing Finance Agency.

The C2MPR program has gone through several changes since it was first approved and it is still evolving. Initially, to qualify for assistance a borrower had to be so far underwater that the combined debt was more than 125% of the home’s value. The minimum combined loan-to-value ratio has been lowered with Treasury approval to 107%. Experts are hoping it might be lowered further to 100%.

Perfecting this second-lien program will be important for California, which is believed to have a larger concentration of HELOCs than other states. Analysts at CoreLogic have made a rough estimate that 1.4 million of HELOCs where originated in the Golden State during the boom years of 2004 and 2005.

Generally, borrowers pay only interest during the first 10 years of a HELOC before it resets. The 2004 HELOCs are starting to reset this year. The borrowers will have to pay both interest and principal each month for the first time.

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