Wonder why the US banking system has done everything in its power to remove as much housing inventory from the market as possible (primarily as a result of a foreclosure pipeline that is hopelessly and 100% purposefully clogged up as explained in Foreclosure Stuffing)? One simple reason: to provide an implicit housing subsidy be removing well over 2 million housing units from the low end of the market. These houses are still in existence, but the to the banks the trade off of inducing an artificial price rice in performing housing more than offsets the capital shortfall associated with the lack of mortgage cash flow on homes which are in various stages of foreclosure (and where squatters can live mortgage-free for years because it benefits the bank to retain a status quo of collapsing shadow inventory).
What this in turn translates to is one simple word: HELOC, or home equity line of credit, the same mortgage piggy bank that everyone abused in the peak years of the housing bubble, and which product class as we demonstrated three months ago has just hit peak delinquency rates. Recall: "We note home equity lines of equity because as of June 30, 2012, long after HELOCs were widely available to Americans locked in a rabid pursuit to extract as much equity as they could out of their homes, is when the 90+ day delinquent rate on this product hit an all time high of 4.92%, and is finally rising at a breakneck speed....Note the surge in HELOC delinquencies now that the HELOC product is no longer a fad, and consumers can't wait to stop paying back debt which will never be worth even one cent courtesy of the secular loss of real estate value and pervasive underwater prices."
While everything above was correct, we were wrong about one thing: assuming that HELOCs are "no longer a fad" because it appears we couldnt be further from the truth. As Bloomberg reports: "After six years of declines, lending for so-called Helocs will rise 30 percent to $79.6 billion in 2012, the highest level since the start of the financial crisis in 2008, according to the economics research unit of Moody’s Corp. Originations next year will jump another 31 percent to $104 billion, it projected." And there it is: the worst of the worst housing bubble byproduct is baaaack, baby.
“If house prices continue to rise, home equity lending will keep rising,” said Mustafa Akcay, a Moody’s Analytics economist in West Chester, Pennsylvania. “Lenders have been worried about the ability of consumers to pay back their loans, and as the economy improves, that concern is easing.”
Will US consumers, burned from the lessons of the credit crisis use this money prudently to pay down other, more expensive debt? Don't make us laugh:
“People will spend more of their equity,” said Chris Christopher, an economist at IHS Global Insight in Lexington, Massachusetts. “It won’t be as much as they spent when prices were gaining at a rapid pace in 2005 and 2006, but it should have a positive impact on consumer spending.”
The revival in Helocs comes as lenders including Bank of America Corp. (BAC), Wells Fargo & Co. (WFC) and Citigroup Inc. (C) are still coming to grips with bad loans made during the housing boom that ended in 2006. Pressed by regulators earlier this year, banks are writing off vintage Helocs wiped out by a housing retreat that stripped about a third of home values in four years. Banks charged off -- or declared worthless -- $4.5 billion of equity loans in the third quarter, the most in two years, according to Federal Reserve data.
Americans had used their homes like credit cards to go on spending sprees during the 2000 to mid-2006 real estate boom, tapping their equity to buy cars, televisions and luxury cruises. Consumers used about $677.3 billion, or about $113 billion a year, from home equity loans for consumer spending, according to a 2007 paper by former Federal Reserve Chairman Alan Greenspan and Fed economist James Kennedy.
The banks, of course, are delighted that the much more expensive HELOC product is finally back:
Typically, the margins banks add to the prime rate might start at around 2 percentage points, what banks would call prime plus 2. Borrowers are approved for an amount they can use in full or just tap when they need, often drawing on Helocs with credit cards or checks. Rates for Helocs vary with location and credit scores.
Wells Fargo, the largest U.S. lender, is offering a prime plus 2 Heloc with a $10,000 minimum in Philadelphia, according to Bankrate.com, an interest rate aggregator. In San Diego, the same loan was prime plus 2.6.
Bank of America, the No. 2 lender, had a prime plus 3.9 Heloc with a minimum of $25,000 in White Plains, New York. The Charlotte, North Carolina-based bank offered a prime plus 3.7 Heloc in Portland, Oregon. All of the loans required at least a 700 credit score and at least 20 percent equity.
Finally, it appears the hope is now that the banks will be the prudent ones and limit lending:
During the housing boom, lenders often would approve lines of credit that exceeded home values. One popular type of Heloc was a 1-2-5 loan that allowed the main mortgage combined with the home equity loan to total 125 percent of a home’s value.
Home-equity lenders and borrowers this time will be more discerning, said Anika Khan, an economist in Charlotte, North Carolina, at Wells Fargo Securities LLC, a unit of San Francisco-based Wells Fargo.
“The memory of the housing boom and the correction will make folks a lot more conservative,” Khan said. “That means only getting the amount of loan they absolutely need, and spending it in a more sensible way.”
This is 100% wrong. The banks are now fully aware, that if something systemic were to happen to them, the Fed and the Treasury would have no choice but to step in and bail them all out. But only if they are all in the same amount of trouble. Which is why when one bank start doing HELOCs, all will, and all will go to town.
What is shocking is that this is all happening just as the last batch of HELOCs has hit record default rates, and have yet to be cleared off the banks' non performing books. But who cares: Uncle Ben will fix it all.
That this will all end in another epic housing and credit bubble collapse is by now perfectly clear to everyone. And yet nobody is doing anything to stop it. Surely, once the system collapses for good next time, as at this point the central banks too are all in on rekindling the bubble and there will be nobody left holding the bag, "nobody will have been able to foresee any of this happening." But for now, the music plays, and one must dance.