According to Home.com’s April Local Market Index, 46% of the top U.S. markets have achieved full pricing recovery. This would seem to indicate that short sales caused by negative equity are on the down-turn. However, there are some new factors that might contribute to a large increase in the numbers of homeowners seeking short sales.
Between 2005 and 2008 RealtyTrac has estimated that there were 3,262,036 HELOCs originated with an estimated balance of $158 billion that are still open loans. Those equity lines are set to re-set between 2015 and 2018, many on properties that are still underwater. The problem however isn’t just possible negative equity; it’s dealing with potentially higher payments.
The first 10 years of a HELOC are what’s known at the draw period when the borrower can draw from the line of credit, and repay as needed. The payments during this period are interest only. However at 10 years, the line of credit is no longer available and the outstanding balance must start to be repaid as an amortized loan, usually over 20 years.
So for example, if a homeowner has an equity line with a balance of $125,000 at 3.4% their interest-only payment would be $354. When that loan re-sets and the homeowner is paying principal and interest payment more than doubles to $718.54. This could pose a real problem for households where post-recession income gains have been limited.
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