“Combine a 30-year, fixed-rate, first mortgage, with an interest-only home equity line of credit (a major product of the Too Big To Fail Banks) and you have economically created a synthetic version of the much-derided (and banned by regulators) Option-Arm mortgage!!!”, Mike Perry
Wells Fargo Rethinks ‘Interest-Only’ Home-Equity Loans
‘Heloc’ Loans Will Only Be Offered to Customers With $1 Million
By NICK TIMIRAOS
June 2, 2014 6:22 p.m. ET
Wells Fargo & Co., the nation’s largest mortgage lender, is sharply curbing its offerings of “interest only” home-equity lines of credit, in what could presage a larger shift by the lending industry.
While the vast majority of mortgages today are fully amortizing, most so-called Helocs allow borrowers to make payments only on interest for up to 10 years. Wells says it is time to rethink the product, as more borrowers face higher payments on loans taken out during the past decade’s housing bubble. For example, a borrower who took out a Heloc in 2004 would this year need to begin paying down principal, increasing monthly payments.
“We wanted to fix a flaw in the product that caused payments to go up sharply,” said Brad Blackwell, executive vice president of Wells Fargo Home Mortgage. The bank began limiting interest-only offerings to customers with at least $1 million in savings or other liquid assets last November. The bank says the changes will be better designed to protect consumers for the long term.
Because many consumers don’t make principal payments, “they’re not creating any additional equity in their properties,” Mr. Blackwell said. That is causing problems for borrowers who have found they don’t have enough equity to refinance those loans as higher payments kick in. “We took this move not only because it’s the right thing to do for our customers, but because we’d like to lead the industry to a more responsible product,” he said.
It isn’t yet clear that other lenders will follow Wells’s lead. The San Francisco-based lender accounted for about 14% of home-equity borrowing last year, making it the largest such lender, according to Inside Mortgage Finance.
Bank of America Corp. , which ranked second last year in home-equity lending, is “currently considering an amortizing payment structure based on customer feedback,” said a bank spokesman. J.P. Morgan Chase & Co., which was No. 3, said the bank also is reviewing repayment options for new home-equity loans.
The shift toward fully amortizing loans “makes a lot of sense,” said Anthony Hsieh, chief executive of loanDepot.com, a privately held mortgage bank in Foothill Ranch, Calif. He says the lender, which doesn’t currently offer Helocs, will only make fully amortizing loans once it rolls out a Heloc product.
New mortgage regulations that took effect this year provide stiffer potential penalties when lenders fail to document borrowers’ ability to repay their loans, and those rules have already limited lenders’ offerings of interest-only mortgages. But it isn’t clear the rules apply to Helocs, raising the prospect some lenders will use those loans to get around the lending curbs. “That is a very bad decision for consumers, and we don’t want to see that happen,” said Mr. Blackwell of Wells Fargo.
Rising home prices have led to a modest rebound in home-equity lending over the past year, though borrowing is still at a fraction of the levels seen during the past decade’s housing bubble.
Banks see Helocs as a significant potential growth area, because many homeowners have locked in ultralow interest rates in recent years. To the extent those borrowers want to borrow against their homes as values rise, they are more likely to take out a Heloc than refinance into a larger first mortgage, so that they don’t have to give up their low interest rates.
More than 800,000 borrowers could see payments jump on their Helocs this year, as their 10-year, interest-only periods end, followed by more than one million homeowners in each of the next three years, according to Equifax Inc., the credit-reporting firm.
Wells forecasts that about $28 billion on some $74 billion of its Helocs will recast through 2017. The bank says it has reached out to borrowers as much as two years before their loan recasts to encourage those borrowers to refinance or pay down debt, and Mr. Blackwell says the bank isn’t seeing a material increase in delinquencies on those loans.
The changes “essentially will eliminate the end-of-draw payment shock issue” for new customers, said Mr. Blackwell.
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