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The housing market bubble isn't over, after all.
Thousands of home equity loans made in the peak years of the housing bubble are just starting to reach their 10th birthday, which for many borrowers will bring very bad news.
You see, most home equity loans are interest-only for the first 10 years. But after that, the borrower must start paying down the principal, which can cause their monthly payments to triple or more.
For example, the monthly payment for a typical borrower with a $30,000 home equity loan and an interest rate of 3.25% would rise from $81.85 to $293.16.
Other homeowners could see their monthly payments jump by $500 or $600, depending on the amount and terms of the original loan.
This is worrisome news for everyone – the borrowers, the banks that hold these home equity loans, and the overall housing market, which hasn't fully recovered from the housing market bubble and doesn't need any fresh headwinds.
"The day of reckoning has arrived for those who took out those home equity loans, and for the banks that pushed home equity lines of credit like they were cheap credit cards," wrote Bob Stokes of Elliot Wave International.
Another Housing Market Bubble
The problem has only just started to bloom…
The home equity loans turning over now were made in 2003, just as the housing market bubble was heating up. It didn't peak until 2007.
According to the Federal Deposit Insurance Corporation (FDIC), home equity lines of credit soared 77% from 2003 through the end of 2007, from $346.1 billion to $611.4 billion.
And the dollar amounts of the loans affected will rise dramatically each year through 2017 – $29 billion of these loans reset in 2014, $53 billion in 2015, $66 billion in 2016, and $73 billion in 2017.
That's why Amy Crews Cuts, the chief economist at the consumer credit agency Equifax, called the looming increases a "wave of disaster" at a conference in Washington last month.
The Housing Market Bubble Revisited: Defaults and Foreclosures
While we know how many home equity loans will reset, and how large they are, what no one knows for sure is how many of these loans will end up in default, which would result in foreclosures.
The key is the percentage of borrowers who default, and the early trend is not encouraging…