As the increasing number of home loans hit their 10 year mark it could make a lot of borrowers start paying the principal amount on the loans that they took during the housing bubble a decade ago. They would also need to pay interest they had been paying on the loan all this time and the current economic condition would only make things worse for them. A large number of borrowers are missing payments on home equity lines of credit due to the financial situation and this can lead to a trouble for lenders who depend on it to carry on with their services.
Majority of the large banks in the US made the most of housing bubble that hit during the past decade. Many banks proactively funded loans thinking that they could depend on the collateral value of homes to keep rising. Little did they know that the economic condition was going to worsen and make it really difficult for them to recollect their funds. Most of the banks require borrowers to start repaying the principal amount after ten years; however, many of them did not anticipate the changes in market that has turned the situation against them.
It is easy for the borrower to make repayments in early years of the mortgage but after it completes 10 years, the repayment would be more than triple on a monthly basis. This situation may become troublesome for the borrower looking at the economic conditions at that time. A number of banks are already bracing themselves for its impact on their profits and many of them have even come up with ways to make it easy for borrowers to make repayments.
Some of the things that banks have planned to reduce their losses are:
- A workout program needs to be signed if the borrower is unable to make payments for mortgage.
- The borrowers will have to pay only the interest under this program.
- They could also be given an option to repay the principal amount in a longer period of time.
There are some banks like Bank of America that have started contacting the borrowers an year before they reach the 10 year mark so that they could make them aware of the principal payment and explain the refinancing options available at their end.
Most of these methods are just precautionary steps that would give lenders temporary relief. Once the Federal Reserve starts raising the interest rates which is expected to happen by July 2015, the numbers of delinquent accounts are only expected to go up. Based on the data collected by Equifax, the amount of delinquencies could rise to about 6% this year compared to 3% in 2003. This is expected to further increase with every year and is making a lot of lenders re-consider their lending strategy.
Most of them generally had a borrower’s credit score to base their decision on however now many of the lenders are seeking help of outside agencies that specialize in providing lenders in-depth information on a borrower’s financial condition. If we believe the statement that Amy Crews Cutts, the chief economist at consumer credit agency Equifax made, “What we’ve seen so far is the tip of the iceberg. It’s relatively low in relation to what’s coming,” such background checks on borrowers have become a necessity for lenders to avoid any such problems in the near future.