Lender Processing Services Inc. (LPS) has released its October Mortgage Monitor which shows that 48 percent of outstanding second lien home equity lines of credit (HELOCs) were originated between 2004 and 2006. Given that the vast majority of HELOCs originated during this time have draw periods of 10 years, they are set to begin amortizing over the next several years. As the payments on these HELOCs become fully amortizing, many borrowers may see monthly payments increase. According to LPS Senior Vice President Herb Blecher, recent increases in new problem loans among the HELOCs originated prior to 2004 (that have already begun amortizing) indicate increased risk of more delinquencies ahead.
"In the aggregate, the home equity market is experiencing lower delinquencies," said Blecher. "However, among the HELOC population that has already begun amortizing, we are actually seeing an increase in new seriously delinquent loans. As of today, only 14 percent of second lien HELOCs have passed this 10-year mark, leaving a very large segment of the market at risk of payment increases over the coming years. Nearly half of all of these lines of credit were originated between 2004 and 2006, with the oldest set to begin amortizing next year. If this trend toward post-amortizing delinquencies carries over, we could be looking at significant risk to the home equity market over the coming years.
In addition, the October data revealed the ongoing impact of the disparities between judicial and non-judicial foreclosure states. Judicial states are lagging in home price recovery since the national market's trough in January 2012, and are likewise seeing higher rates of new problem loans and foreclosure starts than their non-judicial counterparts. However, increasing levels of foreclosure sale activity have helped improve pipeline ratios (the ratio of loans that are seriously delinquent and in foreclosure to the six-month average of foreclosure sales) in judicial states. The judicial state pipeline ratio had declined from a high of 118 months of inventory, down to 47 months as of October, much closer to the non-judicial states' 39 months of inventory.
"Turning to the first mortgage market, LPS found that the share of borrowers in negative equity positions has continued to decline as home prices have risen. As of September, that number was just 11.6 percent of active mortgages, down from almost 19 percent in January. As reports of estimated U.S. negative equity tend to vary widely, and to clarify our approach, we are applying a highly refined methodology to our calculations, accounting for not only the current combined loan amount of first and second liens using comprehensive loan and property data, but also the impact of distressed sale discounts on loans in serious delinquency or foreclosure. While distressed sales are making up an ever-shrinking portion of real estate transactions—just 14.2 percent in September, the lowest share since 2007—these sales have prices about 25 percent lower than traditional transactions. Improperly weighing the influence of second liens or distressed sale discounts can skew measures of Americans' equity, or lack thereof, in their homes."
As reported in LPS' First Look release, other key results from LPS' latest Mortgage Monitor report include:
►Total U.S. loan delinquency rate: 6.28%
►Month-over-month change in delinquency rate: -2.8%
►Total U.S. foreclosure presale inventory rate: 2.54%
►Month-over-month change in foreclosure presale inventory rate: -3.2%
►States with highest percentage of non-current loans: MS, FL, NJ, NY & LA
►States with the lowest percentage of non-current loans: CO, MT, SD, AK & ND
