Trends in home equity lines of credit (HELOCs) may provide one of the best illustrations of the contradictions
in the U.S. real estate market. HELOC originations have surged recently on the coattails of a rapid rise in home
prices. Since bottoming out in March 2012, the median home price nationwide has increased 30 percent as of
this past February. This past first quarter, nationwide HELOC originations represented
15. 8 percent of all loan originations, up from 14. 5 percent in 2014 and up from an 11-year
low of 9. 5 percent in 2012.
Meanwhile, 3. 3 million HELOCs originated during the housing price bubble of 2005 to
2008 are still active and scheduled to recast at higher monthly payments over the next
four years as the 10-year interest-only drawdown period typical for many of these loans
comes to an end and the fully amortizing payment kicks in for borrowers — often translating into a monthly mortgage payment that more than doubles. The scariest aspect of
these HELOCs is that about 1.8 million, or 56 percent, are on homes still underwater.
These two seemingly contradictory trends demonstrate a housing recovery that looks
a bit like a game of Jenga. Home prices keep going higher even as pockets of distress
continue to show up and weaken the very foundation of these rising home prices.
Because all real estate is local, it will be helpful to take a look at which local markets have
seen the biggest surge in HELOC originations in this past first quarter (the haves) and
which markets have the highest share of negative-equity bubble-era HELOCs scheduled
to reset over the next four years (the have-nots).
Haves and have-nots
The HELOC have-not markets are mostly like a Jenga game nearing its end, with a leaning structure and not many options for removing pieces at the bottom without causing
a total collapse. To keep the focus on major markets, this have-not list only includes metropolitan statistical
areas where at least 5,000 bubble-era HELOCs are scheduled to reset over the next four years, sorted by the
percentage of those resetting HELOCs that are on homes still underwater.
At the top of the list is Las Vegas, where 89 percent of the 35,182 resetting HELOCs are on underwater homes,
followed by three inland California markets: Stockton ( 83 percent); Vallejo-Fairfield ( 83 percent); and Modesto
( 81 percent). Rounding out the top five on this HELOC have-not list is Orlando ( 79 percent).
On the flip side are the HELOC have housing markets, where big jumps in the share of new HELOC originations
demonstrate rising equity without much evidence of lingering distress. Returning to the Jenga analogy, these
markets look like a game being played with an extra set of blocks, where players no longer need to take from
the bottom of the structure to keep building at the top.
To keep the focus on major markets, this list only includes metropolitan statistical areas with at least 1,000 HELOC
originations in 2014 and at least 250 HELOC originations in first-quarter 2015. At the top of this list is Dayton,
Ohio, where the share of HELOC originations doubled from 19. 2 percent in 2014 to 40. 6 percent so far in 2015.
That was followed by Albuquerque, New Mexico, where the share of HELOC originations also more than doubled,
and Baton Rouge, Louisiana, and Flint, Michigan, both of which saw HELOC originations in first-quarter 2015 top
20 percent. Rounding out the top five HELOC have markets was Boston, where the share of HELOC originations
jumped from 5. 9 percent in 2014 to 17. 3 percent in first-quarter 2015.
Pick your poison
Both the HELOC have and have-not housing markets have elements of unrealized risk. The element of latent
risk is probably more evident in the have-not housing markets, where underwater homeowners with resetting
HELOCs and banks could either work together to keep those at-risk HELOCs as performing loans, or not work
together and see those at-risk HELOCs trigger another wave of defaults.
The element of risk in the have housing markets manifested by rising HELOC originations is more subtle. Returning to the Jenga illustration one last time, if lenders and borrowers find ways to keep building housing markets
higher with more HELOCs and possibly a new breed of “creative” loan products even after they’ve run out of
fundamentally sound building blocks, it could result in another bubble. But if they show restraint and patience
— or are forced to do so by regulation — and allow economic fundamentals to drive growth, then that latent
risk will be avoided. n
The Jenga rules of HELOC markets
Daren Blomquist is vice president
at Realty Trac. With Realty Trac since
2001, he is the company’s primary
media spokesperson and expert on
foreclosure statistics and trends.
Blomquist is managing editor of the
Foreclosure News Report and creates
foreclosure market and sales reports
cited by thousands of media outlets.
He interfaces with the Federal
Reserve, U. S. Senate Joint Economic
Committee and Banking Committee, U.S. Treasury Department,
and numerous state housing and
banking departments. Reach him at
By Daren Blomquist