Wachovia Corp. said on Monday that it's limiting homeowners' ability to tap home equity lines of credit that they haven't used yet as the giant bank tries to cut its exposure to the broadening housing crisis.Other mortgage lenders, including Washington Mutual, Countrywide Financial, Indymac Bancorp have also been cutting home equity lines aggressively, Fred Cannon, an analyst at Keefe, Bruyette & Woods, wrote in a note to investors on Monday.
Bank of America, Suntrust Banks and some other smaller lenders are also starting to cut these credit lines, Cannon added.
Pretty soon we will see almost every lender closing down the HELOCs. I wonder if they industry will revise the requirements and change the terms across the board. When prices were rising by double digits they could not lose - now the same system makes it almost impossible for them to win, or make a profit as the case may be.
Wachovia, which reported worse-than-expected quarterly results on Monday, said in a presentation to investors that it's "implementing additional limitations on utilization of undrawn equity lines."
The bank has more than $60 billion of home equity loans and lines of credit. Almost 1.4% of those are at least 30 days delinquent, Wachovia reported on Monday. That's up from 0.78% a year earlier.
The delinquency rate has almost doubled, and we are not even at the time of Option ARM resets yet. I think lenders will shut down all the lines and re-open them using a much more stringent process. The huge amount of borrowing on a HELOC is a relatively new thing. In the 1980s and 1990s they were not used as credit card substitutes. I read an article recently tying the HELOC lending with the rise of the FICO score - people getting massive credit almost instantly. (Note - I will post a link if I can find the article). The credit lines people were taking during the Bubble even exceeded the value of the house by 10-20% making a loan-to-value ratio 110-120% rather than the old standard of 80-95%.
Home equity lines of credit let homeowners borrow extra money, up to a pre-arranged limit. The loans, which can be tapped when needed, are backed by people's homes, so the interest rate on this type of financing is lower than other unsecured sources such as credit cards.During the housing boom earlier this decade, U.S. consumers borrowed against the value of their homes in record numbers. Home equity withdrawals grew at an annual rate of $300 billion to $400 billion. There's now roughly $2.2 trillion of home equity lines, which represents about 20% of all outstanding first mortgage debt, KBW estimated.
It is not clear if this includes all home equity withdrawals such as the cash-out refis that also became very common over the last 10 years. We see so many people refinancing over and over again, taking out all of their equity every year- these are home-debtors and in no way home owners.
About $1 trillion of these home equity lines of credit haven't been used yet, Cannon noted. If a lot of that extra available cash is withdrawn by lenders, the economy could take another hit, the analyst explained."The importance of home equity lines as a source of household liquidity is a recent phenomenon and one which can have an outsized impact in the current economic cycle," Cannon wrote.
This is the problem - while on one side it offers the home-owners liquidity, it also increases their debt. Remember currently $0.14 per every dollar people make is going to service this and other debts. The economy is so dependent on the debt and the credit - take it away and things collapse even quicker. The current write-downs banks and lenders are making are not even close to $1 trillion yet - but all that HELOC money lent out currently will be at a much higher risk of defualt
Home equity lines of credit were traditionally used for major home improvements and other big-ticket items. But as the housing market boomed and U.S. consumers saved less, these products evolved into cash-management and liquidity tools, Cannon explained in an interview."A lot of Americans don't have much savings but they have these home equity lines," he said. "These may have been used instead of a rainy day fund."
Not much needs to be added to this section. This is the problem right here. It has been encouraged and promoted to use the equity in your home as ones emergency fund. But with falling house prices these funds are evaporating. The equity has been encouraged to do most everything - your rainy day fund, your home upgrade fund, your vacation fund, your credit card reduction fund, etc. etc.
We also know many people used the money to live like Rock Stars and Movie Stars. Everybody wanted a gourmet kitchen - even people who do not cook. People were taking extravagant vacations several times a year. Working class people driving high-end luxury cars. The easy money was spent on everything we could get our hands on. Even when it made no sense. I laugh when I see these House Hunter episodes with people wondering if a walk-in closet the size of a small bedroom will be big enough for all of their clothes. Do people need this much space and so many things?
Some of these homeowners may be relying on these lines of credit to cover expenses when regular sources of income decline. If this access to extra borrowing is pulled, people may default, or have to turn to more expensive financing like credit cards, Cannon said.Other homeowners who haven't had their lines of credit cut yet may borrow the maximum amount quickly before it disappears, he added."It is likely that many of the most vulnerable borrowers are likely to take this action, potentially creating 'bad growth' in home equity portfolios," Cannon wrote.
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