Jul242012
HELOC abusers and lenders faced day of recast reckoning in 2012
Home equity lines of credit (HELOCs) were the favored tools of Ponzis during the housing bubble. These were used like a credit card with an ever-expanding credit balance that didn’t need to be paid back because the house was paying for it. Most borrowers viewed this as truly free money, and they behaved accordingly. This influx of spending drove the economy during the first half of the 00s, and the elimination of this stimulus and the subsequent need to repay this debt is what’s causing our economic doldrums today.
HELOCs are similar to other revolving lines of credit with a few key differences. HELOCs are secured by real estate whereas a credit card is not. If a borrower does not repay a HELOC, the lender can foreclose on the house to force repayment. A credit card is not similarly secured. HELOCs have a minimum payment like a credit card, but the payment is interest-only each month. No principal payment is required — at least at first. After an initial period, the HELOC can no longer be increased, and the balance must amortize to zero over a set period of time similar to a conventional mortgage. In this regard HELOCs are very similar to interest-only ARMs and Option ARMs which proliferated during the housing bubble and created the dreaded ARM recast problem.
Many housing market watchers concluded the wave of ARM resets and recasts would cause millions of defaults and foreclosures. They were half right. These loans did reset, but the interest rates were lower, so that caused little payment shock; however, these loans also recast from interest-only and negative amortization to fully amortizing causing a huge payment shock. The majority of the borrowers who used these loans did default, but these defaults did not lead to an expected wave of foreclosures because lenders chose to allow these borrowers to squat in shadow inventory without making any payments. In short, the payment shock from recasting loans was extreme, it did cause defaults, and these properties are yet to be recycled through the system.
The same issue is facing HELOCs.
Here Comes the Catch in Home Equity Loans
By GRETCHEN MORGENSON
… During the initial years of home equity credit lines, borrowers must pay only interest. Borrowers can also pay down principal if they wish, but many homeowners, short on cash, haven’t done so. At Wells Fargo, for example, in the quarter ended March 31, some 44 percent of the bank’s home equity borrowers paid only the minimum amount due.
Being required to pay only the interest on these loans has made them easier for troubled borrowers to carry. But these easy terms are about to get tougher. What’s known as the initial draw period for home equity lines of credit is coming to an end for many borrowers. Soon, they will have to pay principal as well.
That is the definition of a recast. The problem with these loans isn’t resetting to a different interest rate. With today’s record low rates, that would not be a problem. The issue is recasting to fully amortizing payments, and that will increase the repayment burden on all borrowers. This will be devastating to the Ponzis because in our weak economy and conservative lending environment, they don’t have other sources of borrowing to cover the payments.
Ten days ago, the Office of the Comptroller of the Currency published some frightening figures about the looming payments. In its spring 2012 “Semiannual Risk Perspective,” it said that almost 60 percent of all home equity line balances would start requiring payments of both principal and interest between 2014 and 2017.
The amounts owed in these lines of credit climb significantly in coming years. While $11 billion in home equity lines are starting to require principal and interest payments this year, the amount jumps to $29 billion by 2014, the office said. That is followed by a surge to $53 billion in 2015 and $73 billion in 2017. For 2018 and beyond, it’s $111 billion.
This is no small problem. It’s very reminiscent of the ARM reset and recast problem.
“Home equity borrowers face three potential issues,” the report concluded. They include risk from rising interest rates — most of these loans have adjustable rates — and payment shock as borrowers realize they have to pay down principal. Refinancing difficulties are also a problem, it said, “because collateral values have declined significantly since these loans were originated.”
That’s for sure.
The properties backing many of these loans are no longer worth the amounts borrowed on them. And those amounts are enormous. In the first quarter of 2012, the top four banks held $295.1 billion in revolving residential lines of credit, according to Amherst Securities. Using data from the Federal Reserve, Amherst said Bank of America held $101.4 billion; Wells Fargo, $93.3 billion; JPMorgan Chase, $84.4 billion; and Citigroup, $15.9 billion. As a result, the risks to borrowers cited in the comptroller’s office report will also be faced by their lenders.
The top four banks are holding about $300 billion dollars in second mortgages on their books, and most of these are underwater and worthless. This is the biggest issue facing the banks today. It’s one of the reasons the government and federal reserve are so intent on forcing prices back up to the peak. If they don’t, the losses on these seconds and HELOCs could imperil the banking system.
How banks value these loans has become a hot topic among investors and regulators. This is to be expected, given that so many home equity lines are no longer collateralized by boom-era home values. Last January, for example, financial regulators issued supervisory guidance on how banks should adjust allowances for losses on these loans. And in the first quarter, Wells Fargo said it moved $1.7 billion in junior lien mortgages to nonaccrual status as a result of the guidance. That caused an increase in the bank’s nonperforming assets to $26.6 billion, a 33 percent rise.
But in the second quarter, Wells Fargo showed a 13 percent decline in nonperforming loan balances among junior lien mortgages.
These are among the riskiest loans in any bank’s portfolio. As borrowers are pressed to pay principal and interest, write-offs are almost certain to rise.
Banks have been ignoring this problem and kicking the can down the road hoping that rising home values would restore the equity backing these loans so they could foreclose and regain their capital. Rising prices is not likely to bail the banks out, but it’s the only viable plan they have, so they will likely continue to amend-extend-pretend their way through this problem. I expect to see all these loans modified to avoid the payment shock. Since these loans are underwater, they are a total loss in a foreclosure. No bank is going to be in a hurry to recognize these losses, particularly if they really believe a rising market will make them whole again.
It didn’t have to be this way, for borrowers at least. Had the loan modification programs created by the Treasury Department required banks to write down junior liens more aggressively, homeowners would not be facing a wave of increased payments. But Treasury did not, and its stance allowed the second-lien problem to balloon.
Gretchen Morgenson really has no idea what she is talking about. The second-lien problem did not balloon because the government did not require principal reduction. The problem was created when the banks underwrote these loans in the first place. These loans should never have been made. If the government had forced banks to write these loans down, it would have made them insolvent, and it would have created a huge moral hazard problem. Everyone would want these loans in the future because when house prices crash after the next bubble, borrowers know the debts will be forgiven. Who wouldn’t sign up for free money?
AS Laurie Goodman, an analyst at Amherst Securities, testified to Congress last year, neither of the Treasury’s loan modification programs dealt appropriately with second liens, which include home equity credit lines.
Ms. Goodman did not testify to the “appropriateness” of the government’s handling of the issue. Ms. Morgenson is obviously trying to push her misguided agenda of principal reductions by putting words in Ms. Goodman’s mouth.
In the Home Affordable Modification Program, for example, banks could modify a first mortgage — even reducing principal owed — while leaving the second or home equity line untouched.
As it should be.
And a subsequent program, the Second Lien Modification Program, known as 2MP, treats first mortgages and junior liens equally. Under that program, if there is a rate cut or a principal reduction on a first mortgage, the second lien gets the same treatment. This goes against centuries of practice regarding creditor repayment hierarchy.
Yes, the government trampled the rights of first mortgage holders. The inevitable lawsuits will probably be settled by another government bailout of those first lien holders who lost more than they should have.
“The negative equity position of many borrowers would be dramatically improved if the second lien was eliminated or reduced more in line with the seniority of the lien,” Ms. Goodman told Congress. “Indeed, loan modification programs would be markedly more successful if principal reductions were used on the first mortgage and the second liens were eliminated completely.”
No kidding. That wouldn’t be a loan modification, that would be a free-money giveaway.
But that didn’t happen. The Treasury didn’t force the banks to write down these loans, and billions in balances remain outstanding.
Thank goodness the government made the right decision.
Payment shock for borrowers is nigh. For those who are already struggling to pay their mortgages, this is an unwelcome burden. And it is one that might have been avoided.
Poor Gretchen. She is still whining about the fact that principal reductions are not forthcoming. I wonder if she is a loanowner who would have been helped?
So much has been written about underwater loanowners that it’s easy to forget it’s really the banks who are in danger. If loanowners start defaulting in large numbers or opt for strategic short sales, the banks will get clobbered. It isn’t just the first mortgages that are underwater. The second mortgages and HELOCs are also a big part of the problem.
Hmmmm, someone told me that real estate always go up and mortgage rates always go down.
In fact, when it comes to the NAR, it is worse: as a reminder, US real estate transactions are nothing but glorified and perfectly legal money laundering, which is the main reason why the NAR has a waiver from regulation for anti-money laundering.
Although unlike HSBC, the NAR’s money laundering at least leads to benefits for everyone, in the form of perpetuating the delusion that US real estate is fairly priced.
And lately, with the latest forced delusion being that US real estate has bottomed and is rising even as the global economy is decelerating at the fastest pace in the past 3 years, the NAR serves a handy purpose: it provides a reflexive way of misrepresenting the underlying trends in real estate, suckering the marginal fool in once again, as it did throughout the period between 2000 and 2007.
http://www.zerohedge.com/news/no-housing-recovery-these-three-charts
That’s a great article. Thanks for the link.
Zero Hedge is one of the last really bearish market analysts who backs his opinions with real data. I am not quite as bearish as he is because most market indicators no longer point to continuing declines, but I agree with him that nothing has really turned up which makes most of the talk about a recovery just talk.
Fannie Mae Revises Growth Estimates Downward
A weakened second quarter may indicate a slowdown in economic activity for the rest of the year, Fannie Mae reported Monday.
According to a report from the GSE, its Economic & Strategic Research Group may have been too optimistic in its original 2012 GDP growth projection of 2.2 percent. Its revised growth rate estimate is 2.0 percent.
The group attributed the waning economic growth to drops in consumer confidence and employment opportunities.
“Breaking pace with a strong first quarter, consumer spending has weakened in recent months as the consumer confidence index fell to the lowest level since January,” said Fannie Mae in a release. “Contributing to the downturn is an uncertain job market. The June employment report showed significantly fewer hires compared to the first quarter monthly average, and ongoing concern regarding the European debt crisis and domestic financial markets may suppress a meaningful increase in private payrolls before the end of the year.”
Despite the downgrade in anticipated economic growth, Fannie Mae found a silver lining in the housing market. Year-over-year, home sales increased by 9 percent, and single-family housing starts are nearly 20 percent higher (although still below healthy norms). Fannie Mae expects increased residential investment to contribute to economic growth for the first time since 2005.
In addition, the GSE’s June 2012 National Housing Survey showed that homeowners have greater confidence in one-year-ahead home price expectations. The share of polled customers who said they would buy a home if moving increased by 6 percentage points up to the highest level seen since the survey began.
The group expects housing starts and sales to continue to grow through the rest of 2012 and 2013, owing largely to record low mortgage rates and the belief that housing prices have hit bottom and are likely to increase in the future.
“The data from the past month collectively point to decelerating economic growth, but growth nonetheless,” said Doug Duncan, chief economist at Fannie Mae. “It’s now clear that our bias toward downside risks noted in the June forecast have materialized, pushing down our already modest growth projections. However, despite signs of deteriorating momentum for economic activity, housing continues to be a bright spot as news from the housing market has been relatively upbeat, presenting a rare upside boost to the economy.”
Five Banks Fall Over Weekend, National Tally at 38
The FDIC’s Deposit Insurance Fund (DIF) is an estimated $151.3 million dollars lower after Friday claimed five more banks nationwide.
Royal Palm Bank of Florida in Naples closed Friday, marking the fifth bank closure in the state and the 34th bank closure in the country overall. FDIC announced at the same time the closure of four other banks: Georgia Trust Bank in Buford; First Cherokee State Bank in Woodstock, Georgia; Heartland Bank in Leawood, Kansas; and Second Federal Savings and Loan Association of Chicago. These closings bring the 2012 national tally to 38.
Bank closing details
Royal Palm Bank of Florida in Naples, Florida was the fifth Florida bank and the 34th bank overall to close this year. First National Bank of the Gulf Coast acquired assumed all of the deposits ($85.1 million) and agreed to purchase essentially all of the assets ($87 million). The estimated cost to the DIF is $13.5 million.
Georgia Trust Bank in Buford, Georgia, was the seventh bank to fail in the state so far this year and the 35th overall. Community & Southern Bank assumed all of the $117.4 million in deposits and $111.5 million of Georgia Trust’s total assets. Estimated cost to the DIF is $20.9 million.
First Cherokee State Bank of Woodstock, Georgia, was the eighth Georgian bank to fail in 2012 and the 36th overall. Community & Southern Bank assumed all of First Cherokee’s $193.3 million in deposits and acquired essentially all of the failed bank’s $222.7 million in assets. Estimated cost to the DIF is $36.9 million.
Heartland Bank of Leawood, Kansas, was the first bank in Kansas to fail this year and the 37th overall. Metcalf Bank assumed all of Heartland’s $102.6 million in total deposits and acquired essentially all of Heartland’s $110 million in total assets. Estimated cost to the DIF is $3.1 million.
Federal Savings and Loan Association of Chicago, Illinois, was the fifth bank to close in Chicago this year and the 38th overall. Hinsdale Bank & Trust Company paid FDIC a premium of $100,000 to assume all of the failed bank’s $175.9 million in deposits and agreed to purchase $14.2 million of the failed bank’s $199.1 million in assets. Estimated cost to the DIF is $76.9 million.
Interesting article…I guess. I’m a homeowner who defaulted on his 1st and his HELOC. I have no guilt, only anger that the government and sheeple allowed this charade to go on so long to fleece the public from their wealth. Banks should not be bailed out, people should not be bailed out, the system should collapse, and those whom survive, shall prosper.
All that nonsense being said…I’m on my 2nd modification, on a $330,000 loan, my NEW payment will be $1109/month and that includes taxes. They kicked the can down the road before by not reducing the principal on the first loan….so….I defaulted again. Either make the terms feasible for me to live in the home for a long term, or foreclose and take it. I told them these exact words throughout the 2nd modication process. I don’t give two sh1ts about “keeping the american dream”, because it certainly hasn’t been, nor will it be for me and my household into the future. All the politicians screwed us, not just one party, they both suck, Uncle Tomba and Morman Romney…LOL, this cvountry and screwed and it deserves to be because people cannot turn off their mind programming…aka the fuggin TV.
While I agree with your attitude toward your property and your banks/servicers, I don’t understand your anger toward others for your situation. When you bought your house, they disclosed the price, right? And when you signed-up for a mortgage, they disclosed the amount and the terms, no? You understood its value could decrease?
So why all the anger?
Why are you complaining about paying less to own a property than it would cost to rent a one bedroom apartment in much of Orange County?
“Either make the terms feasible for me to live in the home for a long term, or foreclose and take it.”
Bravo.
Yes, perfectly fine attitude to have today. But what about thinking about this when s/he got the mortgage? The time to make the terms of your mortgage feasible for you to live in the home long-term is at origination, when you run the numbers.
You two are both right. He should have taken those factors into account when he bought, but since he find himself in this situation now, the bank should either change the loan or boot him out. They should boot him out.
I should have thought about that when I put 20% [email protected] percent down. They can boot me out anytime, in fact, I called their bullsh1t bluff. Take the home, go ahead, I don’t give a sh1t. However, I’m not a fuggin idiot and have realized since day one, that the only way for me to re-coup my losses was to play this game…and so far, it has played out very well. Hopefully, I’ll get a 20% principal reduction, and listen to people whine about the “morality” of it. LOL!
The anger comes from the complete sodomizing of the U.S. economy through the stripping of regulation. Anger comes when they STEAL your equity in your home AND your investments in stocks, bonds, 401k, IRA, you name it.
I’m passing no judgment Swiller. The only homeowners that piss me off are the ones who bought a house way beyond their means, were able to cash-out equity many multiples of their income, and have been able to live rent-free for months/years while fighting foreclosure, who then have the audacity to complain about the system that’s “taking their home.”
Just curious…but at what rate and term did your bank modify your loan too? What are the terms for the modification? I know of no one that has been successful in modifying.
Swiller, the only person to blame is you. The bank provided you a house on terms you agreed to. The bank kept their end of the contract. Don’t sign contracts that you don’t WANT to adhere to later on. It’s called responsibility. Btw, I bet you voted for the politicians that passed the deregulation that allowed all of this to happen and put into place captured regulators who had laws go unenforced.
The “bank” and politicians are also to blame right now. Don’t extend and pretend when it doesn’t solve the problem (unafforability).
Swiller is right. Either give him terms he can now afford or boot him out. But, stop playing games that aren’t fixing the underlying problem by extending loan mods that will fail.
I believe IR is right. The solution is foreclosure. But, the banks and politicians seem hell bent on making sure that doesn’t happen. As a result, we find outselves in the current mess that has created a squatters paradise.
“I’m a homeowner who defaulted on his 1st and his HELOC. I have no guilt, only anger”
Anger at WHAT? You bit-off more than you could chew, you gambled and lost, you were stupidly irresponsible, and ON TOP OF THAT you now have the freaking GALL to openly state that you have NO GUILT? Plus you’re “angry” to boot?
I’d like to tie deadbeat bastards like you to a chair and work you over with a baseball bat until every single bone in your body has the consistency of JELLO.
US Housing Inventory Requiring Deleveraging: 30 Million Units
I am not a Housing Bull, thinking that the net impact of massive government and Federal Reserve bought nothing more than some soft stabilization here.
My skepticism pales to that of Real Estate guru Mark Hanson, from whence the chart below comes. Mark writes:
Your comments of “The present RRE situation can be best described as massive Fed stimulus + government induced foreclosure abatements = some stabilization. Anything beyond that statement falls between wishful thinking and a guess.” are dead on . . .
Plus, don’t forget that a 150bps drop in YoY rates increases purchasing power by 17.5% for the 72% of those who use a mortgage to buy. Given prices are up nowhere near that normalized house prices are still down YoY.
Anyway, June is as good as it gets for existing [home sales] . . .
Several folks have been offsides with the inventory issue. The confirmation bias is rampant, with folks obsessing on inventory but ignoring everything else. The inventory I see that has to be de-levered before the housing market has a shot at a “durable” recovery stands at about 30 MILLION units.
Bottom line: In order to really de-lever the housing market something needs to be done about the 20 to 30 million homeowners in a negative or “effective” (lacking the equity to pay a Realtor 6% and put 20% down on a new house) negative equity position; with 2nd liens; and without the credit needed to qualify for a new vintage loan. That’s because repeat buyers are the “durable” demand cohort, not first-timer buyers and “investors” who come and go with the stimulus wind like we saw in 2010 and will again in the second half of this year.
Boy, that article throws a cold bucket of water on the 2012 mini-bubble.
Our bullish spin for the day.
Are the Real Estate Bellwethers Finally Ringing? Check out the Numbers
In case you’re still a nonbeliever that housing has finally crawled its way into recovery mode, ask yourself: What are the bellwether indicators of the early stages of a rebound? You can probably rattle them off.
Rising home prices in the vast majority of the country’s major markets.
Tightening of the supply of houses listed for sale.
Quickening rates of turnover of the available housing inventory – how fast houses listed for sale are put under contract.
You could also add sustained periods of rising single-family housing starts (they were up in June for the fourth straight month), increased number of applications for home mortgages and more pending home sale contracts. All positive.
Boom is a bad word in real estate these days, so let’s not apply it to any of these situations. But rebound or modest recovery? Those terms are hard to dispute.
Hard to dispute? Bullshit.
BS indeed.
To date, the sector bulls are still not able to reconcile:
1) ‘extend and pretend’ does not equate to resolution.
2) It takes $trillions of freshly minted debt (per annum) pumped into the sector to maintain status quo
3) Since the ponzi-oriented, housing-centric economic model… (buying homes expecting prices to rise as time passes so people can extract equity or sell it to someone else for more than they paid)… has imploded, the economy is shifting to something else.
The bulls don’t believe that model is dead. Even the federal reserve has been touting housing as the bright spot in the economy. Everyone wants to go back to the Ponzi borrowing fake economy of the 00s, and it just isn’t going to happen.
That HELOC addiction is powerful. Five years out and people still hope for it.
1.40% 10-year US Treasury yield at today’s close….
Ten years ago I called two credit card companies to ask for a payoff amount and to ask how I could close the accounts at payoff. I was referred to supervisors who spent several minutes attempting to keep my accounts open, making all sorts of accommodations. When that didn’t work, they reverted to “credit card mode” and threatened my credit score (“If you close this active paying account, your score will suffer.”). My point is, they knew I was a profitable customer and they did their best to keep me.
Today, I call BoA to tell them I’m paying-off the second mortgage they own and service. There was no attempt to retain me. I even asked if there’s a “customer retention” protocol or script they’re supposed to use when someone’s paying-off a mortgage double market rates. I at least expected BoA to try to get me to apply for a refi with them. Nope. Their is no attempt to keep valuable customers.
I will never do business with BoA or Merrill Lynch again. I will proselytize to others the evils of doing business with BoA. I will shame friends and family if I learn they have any relationship with BoA (even if it’s just using a BoA ATM!). This is how damaged my relationship is with BoA.
It took by bro almost year a refin just on the balance with 50% equility (excuse after excuse and damaged the 20 year banking relationship). Same condo, same job and same banking for 20 years. Bank wanted to keep the higher interest payments coming in. The new loan was sold off within 3 months.
I’m surprised that they didn’t give you the run around in paying off the loan. I paid off my old loan years ago. Only delay was for the bank to calculated how much to send in to pay it in full.
As for Swiller, he was likely told that RE only goes up. His 20% DP loss but free housing is a much better deal that I got.
[…] HELOC abusers and lenders face day of recast reckoning […]
[…] reserve cannot raise interest rates as long as so many loanowners are so far underwater. The member banks of the federal reserve hold hundreds of billions of dollars in second mortgages and HEL…. If house prices don’t rise enough to put collateral value behind these mortgages, the […]
[…] reserve cannot raise interest rates as long as so many loanowners are so far underwater. The member banks of the federal reserve hold hundreds of billions of dollars in second mortgages and HEL…. If house prices don’t rise enough to put collateral value behind these mortgages, the resulting […]