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HELOCS -- The Next Mortgage Crisis

06/23/2015 10:08 pm ET | Updated Jun 23, 2016

The mortgage crisis isn't a thing of the past. In fact, a new wave of problems is about to hit home equity borrowers. All those "interest-only" home equity loans (HELOCs) that were taken out a decade ago are about to reach the 10-year point where borrowers will have to start repaying principal as well as interest. According to a recent Reuters report, about $221 billion of HELOCs will hit this mark in the next four years.

It could be a double-whammy if the Fed starts raising rates. Higher rates, plus new principal payments could easily double the monthly cost of those loans. And many of those home-owners are still under-water, owing more than the house is worth -- thus making refinancing almost impossible.

The financial services industry is buzzing about the potential impact of the new higher payments. The concern is that it could spur another wave of foreclosures. But many homeowners seem blissfully unaware of the approaching payment changes. Wake up and be proactive about your HELOC.

If you have a home equity line of credit upon which you have been making interest-only payments, this is the time to contact your lender about the possibility of refinancing or at least adjusting the coming HELOC payment. This time around, lenders might be more flexible about lowering that payment by adjusting the amortization schedule to longer than 10 years. But if not, there are other possibilities.

Getting HELOC Help

By now, most consumers know that it's tough to navigate the banking industry. That's why non-profit HUD-approved counseling agencies have been offering advice about government refinancing programs for HELOCs. At www.HELOCHelp.org you can talk to a counselor about the options that could be available if you cannot afford your new higher payment. There are several government programs that apply.

But before you can get any government help refinancing your second mortgage or line of credit, you have to deal with the primary mortgage. Then you're ready to ask for government help to deal with your second loan.

The two major government assistance programs are HARP (Home Affordable Refinancing Program) and HAMP (Home Affordable Modification Program). Both have been extended through 2016. The HARP program is for homeowners who are current, but underwater, on their mortgages insured by Freddie Mac or Fannie Mae. It is a complete refinance at a lower rate. But the HAMP program is just a modification of the terms of the existing mortgage, so the payment becomes less than 31 percent of the borrower's monthly income.

Home Affordable Second Lien Modification Program: The good news is that there is a government program to help you refinance a HELOC; the bad news is that first you must complete a modification of your first mortgage under the government's HAMP program. The second lien can be included in the modification. However, the total mortgage debt cannot exceed 115 percent of the home's value after the refinance.

FHA Short Refinance: If you are not behind on your first mortgage, but owe more than the home is worth, your mortgage servicer may agree to what's called an FHA Short Refinance. As part of that refinance, you may be able to include your second mortgage or HELOC under the FHA Second Lien Program (FHA2LP). The servicer and investor in the second mortgage or home equity loan get government incentives to participate in this FHA short refinance program, to erase the second loan.

If this alphabet soup of programs is confusing to you, you're not alone. That's why an independent, HUD-certified mortgage consultant is almost a requirement to navigate successfully. All of these programs assume that you want to stay in your home. And after all you've gone though in the past seven years, it's definitely worth making the extra effort to modify your HELOC.

Your only other alternative is to ask your primary and secondary lenders to agree to a "short sale" -- taking less than the full proceeds of the loan. But you must get approvals (deficiency waivers) from both lenders or, depending on your state of residence, the second lender may still sue you for the unpaid balance. Yes, you'll need an attorney who specializes in this area of real estate to guide you through the short sale process.

But if you have a HELOC with principal payments coming due, don't give up now. You'll lose your home, and you lose out on all future gains. And if enough American homeowners give up when this HELOC moment of truth arrives, it could derail the economic recovery.

The last housing crisis was shocking to most homeowners who were caught in the crunch. But you know exactly when your next crisis is coming -- the date you must increase your HELOC payments. You won't get trapped if you start planning now. And that's The Savage Truth.