Credit Basics
Borrowers move toward fixed rates to limit risk
April 21, 2006
Jim Freer
South Florida Business Journal
Teaser rates expiring
Many HELOC borrowers have adjustable-rate mortgages, some that were interest only, which they took out at teaser rates three or five years ago. This year, many of those loans are beginning ongoing annual adjustments - in some cases with a first jump 3 percent or more than the original rate.
"There are a lot of households who, two years ago, took out a home equity line to remodel a kitchen or make other improvements, when rates were low," McBride said. Thus, many Americans are facing interest payments twice as high on HELOCs, along with other rising interest rates and higher costs for insurance and gas, he said.
The surge in HELOCs is among reasons total U.S. consumer debt rose from $1.9 trillion at the end of 2002 to $2.2 trillion at the end of last year.
When borrowers can't control HELOC debt, Consolidated Credit helps them prepare for other options. That includes refinancing and ways to reduce overall spending. Dvorkin is concerned that "we may be just at the tip of the iceberg" with problems related to HELOC and other mortgage debt.
For several years, many South Floridians could resolve debt problems by selling homes whose values had soared, he said. This year, the pace of appreciation is returning to more historical levels. "If values retreat, some people could find their homes worth less than what they owe" possibly leading to an increase in foreclosures, Dvorkin said.
No red flag for banks
Data from the FDIC shows that severe problems with HELOCs are still below the 1 percent level regulators consider troublesome. The national non-current rate for HELOCs grew from 0.18 percent at the end of 2004 to 0.24 percent at the end of last year. Non-current loans and credit lines are 90 days or more delinquent or are no longer accruing interest.
Among banks based in South Florida, that rate was 0.17 percent at the end of 2003. It rose to 0.36 percent at the end of 2004 and fell back to 0.18 percent at the end of last year. Northern Trust Bank of Florida and BankAtlantic, the South Florida banks with the most HELOCs, had non-current rates of 0.04 percent and 0.11 percent, respectively.
Northern Trust's client base of business owners and other professionals includes some HELOC borrowers with credit lines of several hundred thousands dollars and more, said Trip Moore, a senior VP in the bank's Palm Beach office. Many borrowers have used HELOCs to pay for children's education, buy cars or second homes, or make investments, he said.
Northern Trust has avoided problems with HELOC repayment because it focuses on borrowers' income, cash flow of business and other "ability to service and repay debt" factors similar to a standard mortgage, Moore said. Some lenders have underwritten HELOCs based largely on built-up equity in homes. "A lot of the concern about HELOCs is because they can be based purely on the value of a home," which can decline as quickly as it once rose, Moore noted.
In a nutshell, that's why HELOCs are a big part of the growing concern about potential problems in local and national real estate markets.
