Borrowers with home equity lines of credit (HELOCs) will face a growing risk of default over the next several years, as the bills come due on millions of such loans.

The credit rating company TransUnion reports that from 10 to 17 percent of the $474 billion in currently outstanding HELOCs could be at elevated risk of default in the next few years as many of those loans enter their repayment phases. That's the point where customers can no longer draw against the line of credit and must begin repaying what they have borrowed.

There are concerns that such a "payment shock" could cause these borrowers not only to miss payments and possibly default on their HELOCs, but to begin missing payments on other debts such as credit cards and automobile loans as well.

Nearly half approaching crucial date

Nearly half of all HELOCs with outstanding balances as of the end of last year were originated between 2005 and 2007, according to TransUnion, with many of them having draw periods of 10 years. That means those loans will enter their repayment phase beginning in 2015.

On top of that, TransUnion calculates that 92 percent of outstanding HELOCs were still in their draw phase as of the end of 2013. In addition, the majority of HELOCs have outstanding balances in excess of $100,000. So the potential financial impact is large.

"The financial shock associated with a HELOC payment increasing to cover both -- principal and interest -- can cause liquidity issues for some borrowers; this dynamic is driving significant concern in the lending marketplace," said Steve Chaouki, TransUnion head of financial services. "Our study indicates that up to $79 billion of those HELOC balances could be at elevated risk of default in the next few years."

16 million outstanding loans

About 16 million U.S. consumers currently have HELOCs with outstanding balances, of whom TransUnion predicts less than 20 percent will face difficulty dealing with payment shock when the repayment phase of their loan kicks in over the next few years.

The TransUnion study suggests that credit scores are a very good indicator of whether a consumer is likely to have difficulty once the repayment phase of the loan kicks in.

While the study concluded that payment shocks for that class of borrowers did put them at greater risk of default or missing payments on other loans, it did not address the question of the impact of such defaults on the economy as a whole.

Published on November 12, 2010