Home Equity Time-Bomb is About to Go Off
July 16, 2012 • 8:44AM

Forget any recovery in sales of new or existing homes, based on the 10% increase in sales of existing homes in May 2012, or anything else, says Gretchen Morgenson in today's New York Times.

The reason is that homeowners are strapped with multiple mortgages—home equity loans in particular. During the initial years of home equity loans, borrowers are required to pay only interest; principal is optional. At Wells Fargo, to take one example, 44% of the bank's home equity borrowers paid only the minimum amount due in the 1st Q of 2012.

This is about to end. The Comptroller of the Currency's "Semiannual Risk Perspective" issued July 3, reports that almost 60% of all home equity line balances will start requiring payments of both principal and interest between 2014 and 2017. While $11b in home equity lines started to require principal and interest this year, that amount increases to $29b in 2014, $53b in 2015, and $111 billion for 2018.

The homes backing these loans are no longer worth the amounts borrowed on them. As borrowers are pressed to pay principal and interest, personal bankruptcies and bank losses will increase.