Home Equity Lines Of Credit Are Back As The Worst Of The Housing Bubble Worst Returns

Tyler Durden's picture




 

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.

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Tue, 11/27/2012 - 12:03 | 3014335 Frastric
Frastric's picture

Subprime bubble 2 bitchez!

Tue, 11/27/2012 - 12:07 | 3014345 SeverinSlade
SeverinSlade's picture

Americans learning their lesson...That's funny.

Tue, 11/27/2012 - 12:21 | 3014396 vast-dom
vast-dom's picture

and add this to the bogus case-shiller bs of this am:

http://online.wsj.com/article/SB1000142412788732335320457812737403908763...

Tue, 11/27/2012 - 12:37 | 3014445 smlbizman
smlbizman's picture

prime....what is this word prime you talk about......i haven't heard that word for at least 3 years now....

ok 10 points if you know the current prime rate without looking it up...

Tue, 11/27/2012 - 13:03 | 3014500 Agent P
Agent P's picture

Fed Funds + 325

Tue, 11/27/2012 - 12:22 | 3014397 idea_hamster
idea_hamster's picture

Uh, excuse me, but ... "Anita Khan"?  Really?  SRSLY?!

Tell me that isn't some banker name pun.  Someone got punked here.

Tue, 11/27/2012 - 12:46 | 3014457 swmnguy
swmnguy's picture

I actually worked on a project for a live event producer named "Anita Mann" a long time ago.  If my perceptions were at all accurate, and I think they were, a man was the last thing she had any interest in.

Tue, 11/27/2012 - 15:02 | 3014899 pods
pods's picture

I guess she didn't produce Buster Hymen and the Penetrators?

pods

Tue, 11/27/2012 - 16:37 | 3015221 roadhazard
roadhazard's picture

Years ago Herb Cain, San Francisco Chronicle used to post names and occupations like that in his column when he found them.

Tue, 11/27/2012 - 16:02 | 3014865 Uber Vandal
Uber Vandal's picture

I wonder how much the elimination or capping of the mortgage interest deduction will help home owners?

http://dealbook.nytimes.com/2012/11/26/mortgage-interest-deduction-once-...

Funny thing, this has been discussed since 2010, perhaps earlier:

http://www.foxnews.com/politics/2010/11/11/proposal-limit-eliminate-tax-...

Even more hilarious, is how the Tax Reform Act of 1986 eliminated the deduction of interest from personal loans, and helped bring about the HELOC.

https://en.wikipedia.org/wiki/Home_mortgage_interest_deduction#United_St...

Prior to the Tax Reform Act of 1986 (TRA86), the interest on all personal loans (including credit card debt) was deductible. TRA86 eliminated that broad deduction, but created the narrower home mortgage interest deduction under the theory that it would encourage home ownership.

You just can't make stuff like this up.

Tue, 11/27/2012 - 12:08 | 3014347 CH1
CH1's picture

Now I understand why the "housing recovery" meme was promoted Matrix-wide.

Tue, 11/27/2012 - 12:48 | 3014431 Cognitive Dissonance
Cognitive Dissonance's picture

Hooray! Everyone back into the (housing equity extraction) pool.

<Now we really get to see who's swimming naked.>

<<If you've seen one prick/bubble you've seen them all.>>

Tue, 11/27/2012 - 12:10 | 3014353 Dr. Richard Head
Dr. Richard Head's picture

Ben "Bubble Bucks" Bernanke. 

Tue, 11/27/2012 - 12:29 | 3014419 ParkAveFlasher
ParkAveFlasher's picture

HELOC-Opter Ben

Tue, 11/27/2012 - 13:49 | 3014647 NotApplicable
NotApplicable's picture

*fwooop* *fwooop* *fwooop* *fwooop*

Tue, 11/27/2012 - 15:05 | 3014914 pods
pods's picture

 

"Put on psch-war operations, make it loud. This is Romeo Foxtrot. Shall we dance ?"

 

Tue, 11/27/2012 - 15:17 | 3014968 ParkAveFlasher
ParkAveFlasher's picture

I was thinking more along the lines of "Suicide Is Painless", which was the theme song of M*A*S*H.

Tue, 11/27/2012 - 21:47 | 3016160 willwork4food
willwork4food's picture

Cute. All I want is a new truck from my equity loan. Is that so bad?

Tue, 11/27/2012 - 12:15 | 3014370 EscapeKey
EscapeKey's picture

Timed perfectly with .com-bubble 2.0 (Amazon, LinkedIn, Facebook, ...).

And a gigantic sovereign bond bubble.

 

Tue, 11/27/2012 - 12:44 | 3014454 catacl1sm
catacl1sm's picture

TRIPLE-BUBBLES! Like the the 3 titted lady in Total Recall.

Tue, 11/27/2012 - 12:16 | 3014375 tocointhephrase
tocointhephrase's picture

If only I could get double bubble!

Tue, 11/27/2012 - 12:28 | 3014415 duo
duo's picture

My HELOC is 2 points lower than my mortgage (5.75%).  I've used it to pay down my mortgage.  What could go wrong?  ZIRP for at least another 3 years, right?

 

Tue, 11/27/2012 - 12:48 | 3014462 swmnguy
swmnguy's picture

My HELOC is only .75 points lower than my mortgage (4.75% and 3.99%).  I've used my HELOC for expensive functional improvements to the house, like insulation and mechanical stuff.  But the thought has struck me to use it to pay off the mortgage.  Only I've got 27 years left to pay the mortgage, and only 14 left to pay off the HELOC.

Tue, 11/27/2012 - 14:31 | 3014778 ParkAveFlasher
ParkAveFlasher's picture

What you need to do is start transferring balances onto credit cards with zero-interest-rate promotions. That'll shorten you a bit.

Wait a sec, think I'm on to something here...

Tue, 11/27/2012 - 15:33 | 3015028 kralizec
kralizec's picture

Tie all debt to my house, buy physical PM, and let the effers take my house when the scat hits the fan!  Woo Hoo!  Go ahead, take that crap!  Bwuuuhaaahaaa!!!!

Tue, 11/27/2012 - 13:12 | 3014522 slaughterer
slaughterer's picture

Replace Geithner with "terrific" Jamie Dimon: Jamie will take care of this Sub-Prime 2.0. /sarc

Tue, 11/27/2012 - 13:34 | 3014596 EuroInhabitant
EuroInhabitant's picture

Be honest: how many of you will buy a home one of these days/months years? Indeed, you are feeding the bubble.

Tue, 11/27/2012 - 14:38 | 3014802 williambanzai7
williambanzai7's picture

FICO

Tue, 11/27/2012 - 21:50 | 3016166 willwork4food
willwork4food's picture

They loved what he'd done to the bathrooms..

Tue, 11/27/2012 - 12:05 | 3014336 Sudden Debt
Sudden Debt's picture

BERNANKE DID IT!!! HE MUST BE A WIZARD!!

ALL HEIL BUBBLE BERNY!!!

 

Tue, 11/27/2012 - 12:16 | 3014374 EscapeKey
EscapeKey's picture

As Marc Faber said, Bubble-Benny has succeeded in creating a bubble in EVERY asset class.

Tue, 11/27/2012 - 13:00 | 3014493 SeverinSlade
SeverinSlade's picture

Except PMs.

Tue, 11/27/2012 - 13:20 | 3014542 slaughterer
slaughterer's picture

Sudden Debt, just wondering did you get Goldman's offer to purchase you yesterday?  Many of us got our psychoanalyst bills included as well as payment in bullion.  

Tue, 11/27/2012 - 12:06 | 3014338 Glass Seagull
Glass Seagull's picture

A chicken in every pot, and Versace loafers for every man, woman, and child!

Tue, 11/27/2012 - 12:15 | 3014372 DeadFred
DeadFred's picture

MUST...BUY...iPADS!!!

Tue, 11/27/2012 - 13:09 | 3014513 Big Corked Boots
Big Corked Boots's picture

NEED... MOAR... DEBT... SLAVES...

Tue, 11/27/2012 - 12:06 | 3014340 maxmad
maxmad's picture

They know hyperinflation is coming... so take out your HELOC

Tue, 11/27/2012 - 12:13 | 3014364 mayhem_korner
mayhem_korner's picture

 

 

Nice.  Juice up money velocity.  It's a self-fulfilling prophecy to liquidate "equity" in fear of coming inflation.

Tue, 11/27/2012 - 12:20 | 3014392 Samsonov
Samsonov's picture

It appears that hyperinflation isn't coming.  Instead, it's hyper-wage-deflation, and it's already arrived.  The effect is the same, but wage deflation is infinitely sneakier because most of the victims volunteer for it without even realizing, in such ways as taking out HELOCs, student loans, etc.

Tue, 11/27/2012 - 12:50 | 3014465 swmnguy
swmnguy's picture

And the "stealth deflation" of smaller package sizes for the same prices at the supermarket.  14 oz. can of coffee?  3.5 qt. "gallons" of milk and ice cream.  That sort of thing.

Tue, 11/27/2012 - 13:01 | 3014497 Bobportlandor
Bobportlandor's picture

That was my conclusion a while back.

Inflation in everything you need and deflation in everything you don't need, labor need not apply.

Around and around we go where we stop now nobody knows.

Tue, 11/27/2012 - 12:22 | 3014399 Harbanger
Harbanger's picture

If hyperinfltion is coming and house prices will go to shit, then why not use the Heloc they give you now to buy pms or otherwise hedge against the market.  They can keep the house, you'd probably have a hard time keeping it just because of the rising property taxes and other costs even without the Heloc,  you can afford to buy 6 houses later.

Tue, 11/27/2012 - 12:32 | 3014428 Snidley Whipsnae
Snidley Whipsnae's picture

Harbanger... You git it. IF one doesn't already have their home/RE mortaged then this is, perhaps, the time to go for a (cheap) mortgage and use the money to buy real assets that will increase in fiat value as the currencies become worth less... Thus, preserving some wealth for the beleagured home owners that have been prudent.  

Silver? Gold? Long Oil? Or, some commodity that will benefit from continued money printing and maybe a war in the Mid East.

The mortgage will be paid off in increasingly worthless currency. Picture the debtors running from the creditors during the Weimar hyperinflation because the debtors didn't want the increasingly worthless currency.

just sayin...

Tue, 11/27/2012 - 12:36 | 3014440 MachoMan
MachoMan's picture

The currency is largely a red herring...  the real battle is over ownership of an asset with utility (housing).  To say that taking out a HELOC without sufficient alternative liquidity (why take out the HELOC then?) is a gamble is a bit of an understatement...  the currency will continue to devalue, but getting it may prove a difficult task.

Tue, 11/27/2012 - 12:42 | 3014450 Snidley Whipsnae
Snidley Whipsnae's picture

Of course the currency is a red herring.

"To say that taking out a HELOC without sufficient alternative liquidity (why take out the HELOC then?) is a gamble is a bit of an understatement..."

All of life is a gamble.

All that make serious amounts of money and are not stuck in a shit paying job have few opportunities to make serious amounts of money.

If one isn't ready to take a risk then that one is forever stuck in a fast disappearing middle class.

I didn't get out of that rut without risk taking... nor will anyone else unless they inherit assets.

Tue, 11/27/2012 - 12:51 | 3014468 MachoMan
MachoMan's picture

Risk taking is one thing.  Putting all your eggs in the hyperinflation basket is another.  I advocate for a refinement of your thesis to include deleveraging (sale of the home and withdrawal of equity through sale) and the purchase of inflationary hedges rather than doing it on credit.  The simple fact is that doing it any other way is making a pretty significant timing decision, of which I think we have insufficient information to reasonably perform.

The other part of your thesis that remained unspoken was that should things get bad and default be necessary, you take your PMs with you and shut your mouth...  lying to the court, under oath, if necessary.  While this may be commonplace in the future, do not give anyone the chance to make an example out of you.

Tue, 11/27/2012 - 13:06 | 3014506 Snidley Whipsnae
Snidley Whipsnae's picture

"The other part of your thesis that remained unspoken was that should things get bad and default be necessary, you take your PMs with you and shut your mouth... lying to the court, under oath, if necessary. While this may be commonplace in the future, do not give anyone the chance to make an example out of you."

You make me laugh... thanks.

Behind every great fortune a great crime is hidden. Behind every little fortune a little crime is hidden.

Our country is full of crooks and you are advocating that the put-upon remain honest. What I am contemplating is small potatoes compared to Corzine, JPM, GS, Liborgate, et al...

If you don't look out for yourself no one is going to do it for you.

Tue, 11/27/2012 - 14:20 | 3014731 MachoMan
MachoMan's picture

I don't dispute in the slightest that most people get shit upon daily and told it's merely chocolate pudding.  I get it.  But your entire argument boils down to two wrongs make a right.  This is why moral hazard is pandora's box...  simply because this moral ineptitude eventually permeates every aspect of our society.  You might say that you're simply stealing back what was stolen from you, but I can say without a doubt that you have no idea of the dollar amount nor all of the responsible parties.  In all likelihood, the people who would be following your plan would be defaulting on a party who had nothing to do with the general theft...  this is where hasty generalizations lie. 

PS, everyone didn't steal their wealth...  and this is a really, really dangerous world view.  It opens the door for blanket confiscation, among other things.

Tue, 11/27/2012 - 12:31 | 3014429 MachoMan
MachoMan's picture

A.  They did not contemplate hyperinflation before taking out the HELOC.

B.  Hyperinflation may be coming, but before they'll be able to repay those loans (for the time being), they'll need an increase in wages...  we have no idea what the mechanism to increase wages will be, nor is it even on the horizon.

C.  If they could have stayed in the house free due to lien issues before, they're now likely giving a creditor a golden ticket to a foreclosure (and thus the other lienholders a free ticket to piggy back, although, they'll still likely need to prove standing/identity).

Tue, 11/27/2012 - 12:48 | 3014461 Snidley Whipsnae
Snidley Whipsnae's picture

I don't know the 'they' that you refer to.

Anyone that takes the HELOC and invests in real assets that have an opportunity to rise in price is better off that anyone that does nothing and sits in the 'going nowhere' house with no mortgage... IF those newly aquired assets do appreciate.

The IF is the risk.

As to your second point... Yes, they could sit in that house till they die of starvation or are unable to pay the increasing monthly utilities...

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