Borrowers face rude awakening as bank calls in interest-only credit lines

Discussion in 'Financial Cents' started by stg58, Apr 1, 2014.

  1. stg58

    stg58 Monkey+++ Founding Member

    As it says rude awakening but forced out of an interest only loan is in many ways a bit a a favor.

    Can't imagine taking out an interest only loan for anything..

    BMO is Bank of Montreal a Canadian bank that has been buying up banks in the USA.

    Some homeowners who took out a home equity line of credit years ago are getting a jolt when an envelope from BMO Harris Bank arrives in the mail.

    The news: Your interest-only line of credit is ending and payment of the full balance will be due.

    Perhaps influenced by regulators' concerns about home equity lines of credit that were issued during the housing boom, BMO Harris and others are halting some home-backed credit lines in which customers, for years, have had to pay only interest each month.

    BMO Harris said it is offering alternative payment options for borrowers who are affected by what the bank acknowledges in a customer letter "may be an unexpected financial burden."

    BMO Harris spokesman Jim Kappel said the bank has put together a special group focused solely on helping customers whose line of credit is ending. Most are expected to be able to obtain some form of refinancing if necessary.

    "Over any course of renewals, unfortunately from time to time there may be someone who has a very distressed financial hardship," Kappel said. "We'll do the best we can to help them through it. But in some instances you can't always find a solution."

    Kappel said he couldn't disclose how many interest-only home equity lines of credit BMO Harris is discontinuing. One borrower who received a notice in the mail said he was told by his contact at the bank that it involved 30,000 customers.

    Kappel said the financial institution's goal in ending perpetual interest-only lines of credit is "creating more predictability and stability over time" for borrowers. He stressed that BMO Harris continues issuing home equity loans and lines of credit, and that they are an important and increasing part of its business in Wisconsin.

    He said BMO Harris doesn't comment on what it has or hasn't been told by its regulators, but it is no secret in the industry that regulators aren't fond of once-popular interest-only lines of credit for homeowners.

    The federal Office of the Comptroller of the Currency, which regulates banks, has been particularly concerned about interest-only home equity lines of credit that were issued to customers during the pre-recession boom period for housing — a time when lenders thought they could count on home values to keep rising.

    Most interest-only home equity lines of credit have a "draw" period, which typically is a seven- to 10-year span when a homeowner is allowed to pay only the interest on the amount borrowed. When the draw ends, however, the borrower must start paying down the principal in addition to making interest payments. That can dramatically increase the monthly cost of the line of credit.

    In the next few years, there could be a bubble of suddenly more-costly home equity lines of credit — or HELOCs, as they're called in the industry — that originated during the housing boom moving into the nation's financial system, unless banks work with their borrowers ahead of time.

    "We're concerned that borrowers who have been able to meet the much lower interest-only payments will struggle to meet the higher payment or absorb the payment shock, if you will," said Bob Piepergerdes, director of retail credit risk for the Office of the Comptroller of the Currency.

    The OCC has asked banks to assess the risks in their portfolios and address them before they turn into problems. The Federal Reserve's recent stress tests at the nation's biggest banks indicated there would be worrisome levels of losses on home equity loans and lines of credit if a severe recession occurred.

    This line a bit different
    The line of credit being discontinued by BMO Harris is different from some in that it doesn't have a fixed time when the draw period ends and payments on the principal must begin. But BMO Harris wants to do away with borrowers' indefinitely paying only interest.

    "What we are doing is we are transitioning some of our customers from a product that we're no longer supporting into a new product or into products that provide greater stability for our customers," Kappel said.

    BMO Harris' interest-only line of credit might actually be performing well for the bank and customers, but nonetheless, regulators now frown on such products, so the bank is compelled to change, said bank analyst Jon C. Bruss, chief executive of Fortress Partners Capital Management in Hartland.

    Bruss said he's been told the interest-only home equity lines of credit were part of the portfolio of M&I Bank before BMO bought the Milwaukee-based financial institution in 2011. He said he considers it "customer unfriendly" to call the loans due, and blamed a heavy-handed approach by bank regulators for the move.

    "This is another instance of the regulators telling a bank how to manage its business," Bruss said.

    Working with borrowers
    Kappel said the goal is to work with all the affected borrowers to move them into a lending arrangement that puts them on a course to paying off the principal.

    "We've been reaching out to every single customer and we've been working with every single customer to find a solution that's going to best meet their needs," Kappel said. "And that could be refinancing into a more traditional home equity line, that could be one that moves to a closed-end home equity loan or that could be an option where a customer might roll their home equity line into their first mortgage and then create a brand new first mortgage."

    He said some customers also may qualify for what the bank calls a "10-20 HELOC." With that type of credit line, a customer can draw on the account and pay interest only on the balance for the first 10 years, and then for the next 20 years would pay principal and interest on the amount owed, with prepayment also an option.

    A letter sent to one BMO Harris customer says the property that serves as collateral for the home equity line of credit will be appraised. Kappel said the appraisal is being done as part of the process of possible refinancing of the borrower's debt — not in preparation for foreclosure if the debt can't be paid off or refinanced.

    Some other banks also are taking steps to scale back or end their interest-only loans. Wells Fargo, which makes the most home equity loans in the U.S. each year, last November stopped offering interest-only HELOCs.

    "We feel as though helping our customers reduce their principal with every payment is the most responsible thing that we can do for them," said Kelly Kockos, senior vice president and head of home equity lending for Wells Fargo.

    Kockos said the bank has been contacting all borrowers who are within four years of reaching the end of their 10-year draw period, after which principal and interest payments would be scheduled to kick in.

    "We have a home preservation specialist and their goal is to work with the customer to make sure they can stay in the home and that they can repay their debt on a payment stream that's comfortable for them," Kockos said.

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  2. cdnboy66

    cdnboy66 Monkey++

    is it possible that banks and lenders are very concerned about upcoming rising interest rates and the effect it would have on foreclosures and defaults on "interest only" loans and lines of credit??
    This way, everyone is swiched over to a "mortgage" with some legal speak to allow foreclosures and repossessions??

    and those that are tight fiscally can be cut from the lenders list
    Marck and Yard Dart like this.
  3. Cruisin Sloth

    Cruisin Sloth Special & Slow

    Sounds about right CDN-Kid , BMO ,TD , ROYAL ,SCOTIA all own huge banks in USA , Mexico . Since 2008 ~09 we should of all had time to re-adjust the money/debt/lifestyle of whats in the future. I know I have , and still at it .
  4. Mountainman

    Mountainman Großes Mitglied Site Supporter+++

    But in the short attention span of the sheeple, they forget soon and just keep grazing along heading for the slaughter.
    Marck and Tracy like this.
  5. BTPost

    BTPost Stumpy Old Fart,Deadman Walking, Snow Monkey Moderator

    If you have NO Debt, then this will NEVER be your issue...... Been Debt Free, since 1995..... .
    VisuTrac and Dunerunner like this.
  6. Dunerunner

    Dunerunner Brewery Monkey Moderator

    Would like to be there, but still owe on the house. I would love to downsize into something I could pay cash for, but that would be after the divorce!
  7. BTPost

    BTPost Stumpy Old Fart,Deadman Walking, Snow Monkey Moderator

    Many folks rode the Housing Bubble to Financial Independence. That is part of my story. when I got engaged, (40+ Years ago) I bought a simple 2 bedroom House, on a 50X100' lot in Seattle, for $10K @ 6% Interest, on a Private Contract Sale.... It was the original House on that 640 Acre Section and built in 1880. It was a dump, but we, (Momma and I) fixed it up so she had a place to live while I went to Alaska, for the summer, to Work. We paid $100US down, and $150US/month, until we had we had paid off the first $1000US, then the Payments dropped to $100US/month. It took us 10 years to pay off that House, and we had a BIG Party with all the Friends, when we burnt the Mortgage. When our last child was on the way, We decided to move OUT of the City, to a Rural County. We sold that place for $48KUS Cash, and used that for a Down Payment, for the DreamHouse we were having built on a 100X200' lot in a new Subdivision, on TOP of a Hill, and also bought a "New to Us", 4X4 Subaru Stationwagon for cash. We lived in that house for another ten years, and when we moved permanently to Alaska, in '91 we sold that place for $170KUS, of which we banked $120KUS. Since we moved into Company Housing, here, we used some of that money to buy LAND, here in Alaska, and built our Beach Cabin, on our Beach Lot. One of the two, 5 acre Lots, we own. We have been Debt Free since 1995.

    My sister did much the same thing in Kommiefornia. She and her Man lived there since the early '60s, slowly working their way up to owning a nice place, in the hills above San Pedro Harbor. He was a School Teacher, and she worked as a MD's Bookkeeper. When he reTIRED, and after all the Kids were Grown & Gone, in 2007, they sold their Place and took the cash, for the House that was long since paid for, and moved to Sandy, Utah. They bought two Houses, outright, for cash, and remodeled both, completely, and still had a significant portion of their cash left. They live in one, and one of their daughters lives in the other, and is paying them back, into the reTIREDment Fund.

    It was possible to do this back when Housing was KING. It is no longer that way, and MANY have seen their Investments in Real Estate crumble into dust. One had to see what the market was doing. Not be Greedy, but Prudent, in ALL ones financial dealings. Watch the trends, but invest in SOLID Long Term things, and let others speculate with their Money, on the High Risk Stuff.....

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