Friday, June 27, 2008

Gimme my HELOC! I need Pergraniteel!

We are on the precipice of Depression 2.0 and there are people upset that the can not use their home equity for $9,000 built-in refrigerators and $30-a-square-foot honed-stone tiles.

Apparently there are people who are still spending hundreds of thousands of dollars on home renovations. Yes there are people who have absolutely no clue that HELOC lenders are closed out by lenders. The Wall Street Journal found and profiled these people in Renovators in Limbo.

Hint - if you have to use your equity to pay for these renovations you really do not have the money to afford them. Another hint - there is a good chance your house is not worth what it was appraised at in 2005 or 2006. The peak housing bubble home values were an illusion. It was financial smoke and mirrors. Be happy if you did not drain out the equity on your home.

Here is the background on the frozen HELOCs from the WSJ article -

Borrowing against home equity has been a major source of funds fueling the renovation boom of recent years. But big lenders, including Bank of America, Citibank, Countrywide Financial, Washington Mutual Bank and USAA, collectively have told hundreds of thousands of customers this year that their home-equity lines have been frozen. Lenders typically include language in their agreements that allows them to cap or cut off a credit line if home values decline, or if a borrower fails to make payments on time.

New credit lines also are being limited. A few years ago, people could borrow as much as 100% of their house's value through a credit line and first mortgage; now most are being limited to no more than 65% of the value, according to HSH Associates Financial Publishers in Pompton Plains, N.J. Home-equity borrowing isn't being approved at all in some areas where house prices have fallen sharply, even for people with high credit scores. "It's ugly out there," says Richard Redmond, a mortgage broker in Larkspur, Calif.

The article includes five stories of people using their HELOCs for major renovations when the line were shut down. The first is about a women from Arizona (yes, she still had a HELOC line in Arizona) spending $40,000 on upgrades to her condo - bathrooms, stainless steel appliances, new floors and brick wall interiors. She will finish it in time.

The second story is about a Penn. man adding a 3-car garage to his house and had his line shut down because he forgot to make a $42 payment.

The third story is about an Ill. fellow who could not get a home equity line so he spent $8500 to get a cash-out refi for the $60,000 he needed. They never really discussed what he was using the funds for.

Another story is about a Georgia couple who were expanding the kitchen and family room with a planned $300,000 remodel. When their equity line was closed they downgraded their plans and sold stock to pay for the work.

The most interesting story is the following -

Countrywide froze Bill and Kathryn Keller's $900,000 home-equity credit line at the beginning of this year -- right before contractors were about to start a $450,000 remodeling of their three-bedroom house in Sausalito, Calif. Since they had access to other funds, the couple decided to proceed with the project, which included redoing the master suite and deck. But paying for it put a crimp in their cash flow. Mr. Keller, a portfolio manager, tried to persuade Countrywide to reinstate the line. When that didn't work he applied to refinance his house, but no lender would offer a new mortgage until the remodeling was complete.

"Lenders are looking for any reason not to give you money these days," Mr. Keller says. Months later, when the job was done, he was able to refinance with another lender for $1 million, which was enough to cover the project and pay off the $400,000 he already owed on his Countrywide home-equity line. But he's still annoyed that he had to scramble to get cash he thought would be readily available.

We are in one of the worse financial downturns since the Depression and people are annoyed that they can not do major renovations. The last story is about a portfolio manager taking another $150,000 out of equity after renovations and paying off the original equity-line. One would think a portfolio manager would understand the difference between debt and wealth.

The only real promising part of the article is the closing paragraph -

[The Arizona condo owner] actually wound up a little happier for the economizing. "In the end, I feel better, because we haven't borrowed as much," she says.

But the HELOC is your money! To spend right now! Anyway you want! Oh, you have to borrow it from a lender based on both what your property is worth and what you can afford to pay back. Oh, nevermind...


donald said...

"We are in one of the worse financial downturns since the Depression..."

Come on now, you can't be serious. We are no where near a great depression. The 1980s were far worse than the current economy. I come to this site for information, but you are starting to sound like another chicken little.

Anonymous said...

Yo donald,

care to revise your statement? This is going to be worse than 1981 times 1929. I love travelling down memory lane.