NEW YORK (TheStreet) -- Mortgage delinquencies have been on the decline, but a new default threat may be arising among second-lien home equity lines of credit extended during the height of the boom.
According to a report from Lender Processing Services (LPS), a large number of so-called helocs are hitting their 10-year draw period, at which point the borrowers will see their monthly payments go up because they will have to start paying down principal in addition to interest.
The sharp increase in monthly obligations increases the risk of a fresh wave of defaults.
Helocs were popular in the days of the housing boom when borrowers were able to obtain a line of credit using their home as collateral. During the "draw" period, borrowers usually pay only interest. At the end of the period, the loan becomes a fully amortizing loan.
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Nearly half of the current outstanding HELOCs were originated between 2004 and 2006, according to LPS. Loans originated in 2004 will begin fully amortizing in 2014, with each consecutive vintage a year after that.
According to LPS, there have been recent increases in new problem loan rates among second-lien helocs originated prior to 2004 are pointing to a risk of more delinquencies ahead.
Among borrowers who will begin paying more next year, credit scores have declined, in some cases substantially, since origination.
"In the aggregate, the home equity market is experiencing lower delinquencies," said Herb Blecher, senior vice president of LPS. "However, among the heloc population that has already begun amortizing, we are actually seeing an increase in new seriously delinquent loans. As of today, only 14% of second lien helocs have passed this 10-year mark, leaving a very large segment of the market at risk of payment increases over the coming years."
A Reuters report published last month also highlighted the threat. According to the report, more than $221 billion of these loans at the largest banks will hit the 10-year mark over the next four years, about 40% of the home equity lines of credit now outstanding.
According to Reuters, the majority of the home equity lines of credit are with the big banks, with the bulk of the loans likely to reset in 2015 and later.
Reuters said: "At Bank of America, around $8 billion in outstanding home equity balances will reset before 2015 and another $57 billion will reset afterwards but it is unclear which years will have the highest number of resets. JPMorgan Chase said in an October regulatory filing that $9 billion will reset before 2015 and after 2017 and another $22 billion will reset in the intervening years."
-- Written by Shanthi Bharatwaj in New York.