Citizens – looking up (official video) (october 2022)
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Seven years after the arrest crisis, citigroup is preparing (C ccitigroup inc73. 80-0. 34% created with highstock 4. 2. 6 ) on what it calls a "payment shock" in its $26. 1 billion rotating principal balance.
Borrowers who paid only $16 billion in interest on revolving home equity loans between 2015 and 2017 will see their payments increase by an average of about $360 per month – a 165% increase, according to citi's second quarter earnings report.
Borrowers pay interest only for the first 10 years. For the next ten years, borrowers pay the principal and interest, which is usually variable, so payments would be even higher if the federal reserve raised interest rates. Loans typically amortize over 20 years, rather than the 30-year amortization for most home loans.
Citi – and the banking industry – have so far steered clear of the surge in home-equity lending. (to read about this, see: choosing a home equity loan or line of credit .)
Weaker loans are starting to reset
One factor, at least at citi, could be that revolving home equity loans that matured before 2015 tended to be stronger than the group that amortized between 2015 and 2017. Of the loans to be repaid, approximately $1. 2 billion. Or 11% had no debt according to the second quarter report as of 30. June 2015 a loan-to-value ratio in excess of 100%.
North america home equity lines of credit write-off – citigroup
In billions of U.S. Dollars as of 30. June 2015
Another factor, as reported in the washington post , may be that the industry has effectively warned borrowers that resets are coming and given them a number of options, in a strengthening economy, to refinance or restructure the loans. This is what citi seems to be counting on.
"Citi continues to closely monitor our HELOC reset risk and has taken additional steps to offset the potential risk," said mark rodgers, director of public affairs for citi, in an e-mail message to investopedia. "These measures include establishing a borrower referral program to allow for reset risk mitigation, forming a reset risk mitigation unit, and a proactive outreach program to at-risk borrowers. We can defer collection of interest on a portion of the principal until the end of the term, as we often do with standard mortgage modifications. We believe we are appropriately and appropriately restrained, and will continue to consider potential impacts on the determination of loan loss reserve allowances. "
Still, the company's annual report says few options will be available to many of its borrowers.(for related reading, see: home-equity loan vs. HELOC: the difference .)
"Borrowers' high loan-to-value positions, as well as the cost and availability of refinancing options, could limit borrowers' ability to refinance their revolving helocs (home equity lines of credit) as these loans reset, " citi's annual report says. Citi itself is in the same boat, as there is a limited market for lenders to sell delinquent home loans, as well as fewer loan modification programs.
As a result, "citi's ability to reduce default interest or net loan losses in its home equity loan portfolio in citi holdings, whether due to deterioration in the underlying credit performance of those loans, resetting of revolving helocs … Or otherwise, is rather limited compared to residential first mortgages," citi said in its most recent quarterly filing.
Citi customers aren't the only ones facing resets. While some analysts have retracted earlier predictions of a mortgage crisis, others insist that the loans represent an imminent crisis. For example, "trouble ahead: tidal wave of HELOC resets about to hit," housingwire warned in april.
Approximately 3.2 million equity lines with a total value of $158 billion remain outstanding and have yet to reset between 2015 and 2018, according to realty trac. More than half of these lines of credit, about 1.8 million, are in properties that are "seriously underwater," meaning that the combined loan-to-value ratio of all outstanding loans is 125% or more.
Risk snapshot for other banks
The three largest equity lines of credit lenders are wells fargo (WFC wfcwells fargo & co56. 18-0. 30% created with highstock 4. 2. 6 >), bank of america (BAC bacbank of america corp27. 75-0.25% created with highstock 4. 2. 6 ) and jpmorgan chase (JPM jpmorgan chase & co100. 78-0.62% created with highstock 4. 2. 6 ), according to fitch. At jpmorgan, borrowers had the option of paying 1% of the outstanding balance before the loans amortize or making interest-only payments based on a variable index, usually the prime rate.
Jpmorgan expects loans to amortize to $14 billion beginning in the remainder of 2015. The bank expects another $7 billion in loans to be released as borrowers prepay or the bank charges them. Off. "The company manages the risk of helocs (home equity lines of credit) during their revolving period by reducing or reducing the undrawn line to the extent permitted by law when borrowers exhibit a material deterioration in their credit risk profile". Jpmorgan's quarterly report of 30. June.
"Certain factors, such as future trends in the unemployment rate and home prices, could have a significant impact on the performance of these loans," the report said. At bank of america, the total home equity loan portfolio has shrunk to $70.3 billion as of 30. June 2015, according to $74. 2 billion as of 31. December 2014. The bank attributes this in part to customers closing their accounts.
Wells fargo announced in 2014 that it would revise credit so that new lines of credit for equity securities would no longer have an interest-only period. "The product should be designed to protect the consumer over the long term," says brad blackwell. , a mortgage executive at wells fargo told the wall street journal, "we took this step not just because it's the right thing to do for our customers, but because we want to lead the industry to a more responsible product." Added: "we wanted to fix a flaw in the product that was causing payments to rise sharply." (for more information, see:
The fuel that supports the subprime meltdown .) the bottom line > citi has detailed its risks, but other banks could be just as vulnerable: an industry-wide wave of defaults on the total $158 billion of U.S. Equity tapes reset through 2017 remains a real possibility.