Wednesday, July 8, 2009

Not Making Payments

Apparently the number of HELOC that have payment delinquencies is increasing. With rising unemployment rates we can expect this number to continue climbing. And with allowing HELOCs just for having some equity in the home, as during the bubble, there were many people who could never really afford their lines in the first place.

More delinquencies also means more loss and write-off for the banks. The big question is what are the lenders breaking point. They already have government funds propping them up - but will that be enough? Probably not for some. So let's take a look at this Washington Post article titled Delinquencies On Home-Equity Loans, Credit Cards Hit Historic Levels -

Delinquencies on home-equity loans and credit card payments hit record highs in the first quarter of this year, according to data released today by the American Bankers Association.

Home-equity loans were one of the major culprits of the current crisis. To recap: Cheap credit caused a housing boom in the first part of this century. Skyrocketing home values led homeowners to take out home-equity loans -- essentially, treating their homes like ATMs -- to buy consumer products. Then, when home values started flattening then falling, it all collapsed, debt upon debt.

According to the American Bankers Association, delinquencies on home-equity loans climbed to 3.52 percent from 3.03 percent in the fourth quarter of 2008, with late payments on the loans jumping to a record 1.89 percent.


This is even worse news: It means people are living off their credit cards with 28 percent interest rates now that their home-equity loans have run out.

This is why smart people are skeptical that the U.S. is in a real recovery. Many believe there's more bad news to come until unemployment starts dropping and home prices stabilize.

Things are interconnected - if people are not working they can not pay their bills - including HELOCs. We wonder were the new historic highs will be. Close to 5%? Maybe more?

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