Wells Fargo Will Stop Offering Most ‘Interest-Only’ Home-Equity Loans

Kennesaw’s Ashford Capital Partners’ Managing Partner Matthew Riedemann brings you news you can use.

Wells FargoWFC +0.03% & Co. is overhauling its offerings of home-equity lines of credit so that most new customers will be required to pay principal and interest over the life of the loan, a significant shift by the nation’s largest home-equity lender.

Monday’s WSJ takes a look at how more homeowners who took out so-called Helocs during the housing boom are now facing higher monthly payments as 10-year “interest-only” periods end, requiring borrowers to make interest and principal payments.

Many consumers borrowed heavily during the housing bubble with little consideration for what would happen in 10 years, since few expected home values to decline sharply and leave them without the ability to refinance their loans and avoid higher payments.

Loan performance data from EquifaxEFX -1.22%, the credit-reporting firm, shows that delinquencies rise for borrowers who face increases in monthly payments.

By restructuring the product, Wells eliminates the prospect of future payment-shock issues. “The product should be designed to protect the consumer for the long term,” said Brad Blackwell, a mortgage executive at Wells Fargo. “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.”

Wells says that it will continue to offer interest-only Helocs only for customers with significant assets. While the vast majority of homeowners today take out first-lien mortgages that are fully amortizing, most Helocs allow borrowers to make only interest payments typically for 10 years.

“By doing so, they’re not creating any additional equity in their properties,” said Mr. Blackwell. Requiring loans to amortize from the start gives consumers a payment that’s more realistic and helps create equity in the home. “We wanted to fix a flaw in the product that caused payments to go up sharply,” he said.

New mortgage regulations that took effect in January provide stronger potential penalties if banks fail to document a borrower’s ability to repay a mortgage. But those rules, which have already limited lenders’ offerings of interest-only mortgages, don’t apply to Helocs, raising the prospect that some lenders will push Helocs to get around the new lending curbs. “We don’t want to see that happen,” said Mr. Blackwell.

Rising home prices led to a rebound in home-equity lending in the first quarter, though overall home-equity borrowing is still at a fraction of the levels seen during the past decade’s housing boom.

Banks see Helocs as a source of potential growth not only as home prices rise, but also because so many homeowners have refinanced at ultra-low mortgage rates. Those borrowers are much less likely to refinance into a larger mortgage if they want to draw on any home equity because it would require them to give up that low rate, especially if interest rates rise further. That could make Helocs much more popular in the coming years.

It’s unclear yet if other lenders will follow Wells’ lead in eliminating interest-only offerings. The bank accounted for around 14% of all home-equity lending last year, making it the nation’s largest lender, according to Inside Mortgage Finance, an industry newsletter. J.P. Morgan Chase & Co., the third largest home-equity lender, is evaluating similar changes, the company said.

The changes don’t have much practical impact for current borrowers. Wells forecasts that around $28 billion of some $74 billion in Helocs will recast through 2017. The bank says it reaches out to borrowers as much as two years before their loans require higher payments to encourage them to refinance or to pay down debt before those loans come due. “The impact of the end-of-draw event, to date, has been much less than we expected,” said Mr. Blackwell.

Come back tomorrow to  where Kennesaw’s Ashford Capital Partners’ Managing Partners Matthew Riedemann brings you news you can use.

By: Nick Timiraos –