Jun062014

HELOC lending is up, but lenders still won’t lend to Ponzis

Overall lending is up, particularly for HELOCs, but lenders are very choosy about who they lend money to, saying no to Ponzis.

mini_bernie_maddoffLenders were burned by millions of borrowers running personal Ponzi schemes during the 00s. I documented thousands of cases of people borrowing and spending their houses during the housing bubble, and many others were running Ponzi schemes with credit cards and other debt instruments. Lenders had to endure painful write downs during the recession (as they should), so they are not eager to restart millions of individual Ponzi schemes and lose billions of dollars again in the next recession — or at least they should be worried about giving away free money, but maybe they aren’t….

Borrowers Tap Their Homes at a Hot Clip

Helocs Jumped 8% in the First Quarter

By Joe Light and AnnaMaria Andriotis, May 29, 2014 7:57 p.m.

A rebound in house prices and near-record-low interest rates are prompting homeowners to borrow against their properties, marking the return of a practice that was all the rage before the financial crisis.

What could go wrong?housing_bubble_survivor

Home-equity lines of credit, or Helocs, and home-equity loans jumped 8% in the first quarter from a year earlier, industry newsletter Inside Mortgage Finance said Thursday. The $13 billion extended was the most for the start of a year since 2009. …
While that is still far below the peak of $113 billion during the third quarter of 2006, this year’s gains are the latest evidence that the tight credit conditions that have defined mortgage lending in recent years are starting to loosen. Some lenders are even reviving old loan products that haven’t been seen in years in an attempt to gain market share.

That puts us 10% of the way back to “normal” market, right?

We’re seeing much more aggressive marketing campaigns [for Helocs] by banks in locations where home prices have risen,” said Amy Crews Cutts, chief economist at Equifax Inc., a firm that tracks consumer-lending trends. She said Heloc originations picked up in recent months as consumers began home-improvement projects. “We expect to see quite an uptick in Heloc activity” in the spring, she said.

Home improvement projects? Bullshit.

WhereDidAllTheHELOCCashGo2

“The driver is increased customer demand,” Mr. Potere said. “It’s an effect of higher consumer confidence and improving home values.” …

It’s consumers being offered free money and taking it — nothing more.

“That is the No. 1 product that customers want,” said Kelly Kockos, Wells Fargo senior vice president of home equity.

Who wouldn’t want free money?

free-money

During the housing boom, Helocs were a source that many consumers tapped to remodel their homes, buy new cars and boats, travel and send their children to college. Lenders often let them borrow up to 100% of their home’s value, in the expectation that prices would continue to rise. However, when prices fell and borrowers weren’t able to repay, banks faced steep losses.

As they should.HELOC happiness

This time, lenders seem to be offering Helocs only to borrowers with good credit in locations where home values have risen, said Keith Gumbinger, vice president of mortgage-information site HSH.com. During the boom, homeowners could borrow up to 100% of their home’s value, said Mr. Gumbinger. Now it is most common to see a maximum of 80% and sometimes 85%, he said.

A number that’s sure to rise as lenders compete for this business. Not long ago, the best that could be found was 80% LTV; now it’s up to 85%.

“Relative to where they were, lenders are still very conservative,” said Mr. Gumbinger. “Will the excesses of yesterday return? Only time will tell.

So far, lenders haven’t completely lost their minds; they aren’t giving this money to the bubble-era Ponzis… yet.

Rising Household Debt: Increasing Demand or Increasing Supply?

Basit Zafar, Max Livingston, and Wilbert van der Klaauw, May 28, 2014American_Dumbass

Total consumer debt continued to increase in the first quarter of this year, marking the first time since the recession that aggregate debt had grown for three consecutive quarters, according to the May 2014 Quarterly Report on Household Debt and Credit. Is this increase in household debt driven by changes in supply or demand? The January 2014 and April 2014 Senior Loan Officer Opinion Surveys (SLOOS) show an increase in lenders’ willingness to make consumer loans over the last several quarters and an increase in the number of lenders reporting looser lending standards, which indicates that credit supply is increasing. …

Lenders clearly want to lend more money; however, they also want to get paid back, so they select their borrowers carefully.

To assess the demand for credit and measure how much of that demand was met, we classify our respondents into four groups. In February 2014, 40 percent of respondents reported not applying for any type of credit over the past twelve months because they didn’t need it (satisfied consumers); 40 percent of respondents reported applying for some type of credit and being approved (accepted applicants); 13 percent reported applying for some type of credit and being rejected (rejected applicants); and 8 percent reported not applying for credit despite needing it because they believed they would not be approved. This last group represents latent demand for credit; we refer to them as discouraged consumers. The leftmost two bars in the chart below show that the distribution of respondents in February 2014 looked quite similar to that in May 2013 (the results of which we discussed in a previous post): we see a slight increase in satisfied consumers from May to February and a slight decrease in accepted applicants. …

Borrowers’ Credit Experiences, by Credit Score

The picture, however, varies radically when split by credit score. The chart above shows that individuals with lower credit scores (those with credit scores below 680) were more likely to report that they were rejected, and much more likely to report that they were discouraged, than their more creditworthy counterparts. In February, 22 percent of respondents in the low-credit-score group were discouraged, versus 3 percent in the middle-credit-score group, and zero percent in the high-credit-score group (those with scores of above 760). Furthermore, the chart shows that credit experiences got markedly worse for the low-credit-score group in February 2014 compared with May 2013: 57 percent of this group reported either being denied credit or being too discouraged to apply in February this year, versus 47 percent in May of last year. This result contrasts with the experiences of their more creditworthy counterparts, which were largely unchanged since May 2013. These patterns suggest that although banks may be increasing their lending activity, they are not necessarily taking on more risk, as the risky population has not seen an improvement in its ability to obtain credit.

Change in Demand for Credit Cards (May 2013-February 2014), by Applicant Credit Score

Change in Demand for Mortgages (May 2013-February 2014), by Applicant Credit Score

We have shown that aggregate patterns in credit experiences and expectations mask substantial heterogeneity among consumers. As of February 2014, while customers with better credit seem to be faring better in terms of both their experiences (with lower reported rejection rates over the past year) and more optimistic expectations for the future, credit access seems to have worsened for higher-risk borrowers since last year. These borrowers are more likely to be discouraged, to report higher credit denial rates, and to be quite pessimistic in their expectations for future access to credit.

Our results are certainly not consistent with lenders taking more risk, and suggest that recent findings from the New York Fed’s Quarterly Report on Household Debt and Credit of decreased balances (particularly for mortgages and credit cards) among borrowers with worse credit are possibly, in part, owing to supply-side factors.

At the same time, we find that consumers, particularly those with bad credit, continue to be constrained and to report significant credit needs.

Of course people with bad credit report significant credit needs. Those borrowers running personal Ponzi schemes need new credit to service old debts and spend more money. Lenders are wisely not giving it to them — for now.

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