Back in August of 2010, I noted that HELOC abuse had hit a record low. Since then, it has declined even further. A recent report from Fannie Mae puts mortgage equity withdrawal at a 26-year low. I guess when owners have no equity, it’s much harder to raid the piggy bank.
Our national economy has become completely dependent upon loan owners. What will it take for us to kick the habit? 
85 Percent of Refinancing Homeowners Maintain or Reduce Mortgage Debt in Fourth Quarter: 26-Year High
Real Cash-Out Volume at 16-Year Low
MCLEAN, Va., Feb. 2, 2012 /PRNewswire/ — Freddie Mac (OTC: FMCC) released the results of its fourth quarter refinance analysis showing homeowners who refinance continue to strengthen their fiscal house. This release of the report also contains annual statistics on refinances for the ten largest metropolitan areas and four Census regions of the U.S.
News Facts
- In the fourth quarter of 2011, 85 percent of homeowners who refinanced their first-lien home mortgage either maintained about the same loan amount or lowered their principal balance by paying-in additional money at the closing table, a 26-year high. Of these borrowers, 37 percent maintained about the same loan amount, and 49 percent of refinancing homeowners reduced their principal balance; this latter percentage reflecting “cash-in” borrowers was the highest in the 26-year history of the analysis.
- “Cash-out” borrowers, those that increased their loan balance by at least five percent, represented 15 percent of all refinance loans, the lowest percentage in the 26 years of analysis; the average cash-out share during the 1985 to 2010 period was 46 percent.
Anecdotally, this makes sense. About 40% of the population are spenders by nature. If given the chance to take free money and spend it, about 40% will. The remainder are likely legitimate renovation projects funded by home equity that ostensibly add value.
- The median interest rate reduction for a 30-year fixed-rate mortgage was about 1.4 percentage points, or a savings of about 26 percent in interest rate. Over the first year of the refinance loan life, the median borrower will save about $2,700 in interest payments on a $200,000 loan.
- The net dollars of home equity converted to cash as part of a refinance, adjusted for inflation, was at the lowest level in 16 years (since the third quarter of 1995). In the fourth quarter, an estimated $5.5 billion in net home equity was cashed out during the refinance of conventional prime-credit home mortgages, down from $5.6 billion in the third quarter and substantially less than during the peak cash-out refinance volume of $83.7 billion during the second quarter of 2006.
From $83.7B to $5.6B is a 93% decline in mortgage equity withdrawal. Over the course of a year, that’s about $300B not being spent to stimulate the economy.
- Among the refinanced loans in Freddie Mac’s analysis, the median value change of the collateral property was a negative 4 percent over the median prior loan life of almost four years. In comparison, the Freddie Mac House Price Index shows about a 23 percent decline in its U.S. series between September 2007 and September 2011. Thus, borrowers who refinanced in the fourth quarter owned homes that had held their value better than the average home, or may reflect value-enhancing improvements that owners had made to their homes during the intervening years.
- Of the ten largest metropolitan areas, the share of “cash-out” borrowers has fallen in all areas, with Detroit and Miami experiencing the largest declines. The “cash-in” share was up sharply in the U.S. and in all ten large metropolitan areas. Median house values on refinance loans have declined in all ten areas, with the sharpest declines in Detroit and Miami.
Quotes
Attributed to Frank Nothaft, Freddie Mac vice president and chief economist:
- “The typical borrower who refinanced reduced their interest rate by about 1.4 percentage points. On a $200,000 loan, that translates into saving $2,700 in interest during the next 12 months.
- “Savvy homeowners are taking advantage of some of the lowest fixed-rates in more than 60 years to lock in interest savings. Fixed-rate mortgage rates hit new lows during December, with 30-year product averaging 3.96 percent and 15-year averaging 3.25 percent that month, according to our Primary Mortgage Market Survey.”
Get the latest information from Freddie Mac’s Office of the Chief Economist on Twitter:@FreddieMac
Cash-out Refinance Analyses Information
These estimates come from a sample of properties on which Freddie Mac has funded two successive conventional, first-mortgage loans, and the latest loan is for refinance rather than for purchase. The analysis does not track the use of funds made available from these refinances. The analysis also does not track loans paid off in entirety, with no new loan placed.
- Quarterly Cash-Out Statistics [XLS] [XLS]
- Quarterly Cash-Out Volume [XLS] [XLS]
- Annual Cash-Out Statistics by Census Regions and 10 Largest MSAs [XLS] [XLS]
Was HELOC abuse really that common? The chart above illustrates how bad it was. At the peak in 2006, an astounding 88% of all refinances had cash out exceeding 5% of the loan balance. Eighty-eight percent! And notice how our economy sputters after each flurry of mortgage equity withdrawal.
$1,770,000 HELOC abuse and nearly three years squatting
The 1% really do live by different rules than the rest of us. If you manage to get yourself into an expensive home by borrowing a huge sum, lenders reward you with hundreds of thousands of free money, and they will let you squat for years if you can’t pay them back. I want to be one of the 1%.
- Today’s featured property was purchased on 7/22/2002 for $1,900,000. The owners used a $1,330,000 first mortgage and a $570,000 down payment.
- On 9/15/2003 they began their HELOC abuse journey by refinancing with a $1,500,000 first mortgage.
- On 5/12/2004 they refinanced with a $1,695,900 Option ARM.
- On 2/9/2005 they obtained a $250,000 HELOC.
- On 2/7/2006 they got another $208,995 HELOC.
- On 6/29/2007 they obtained a $2,600,000 Option ARM first mortgage.
- On 7/18/2007 they opened a $500,000.
- Assuming they maxed out the HELOC, the total property debt was $3,100,000 plus negative amortization, missed payments and fees.
- Total mortgage equity withdrawal was $1,770,000.
- Total squatting time was at least 31 months.
Recording Date: 09/30/2011
Document Type: Notice of Sale
Foreclosure Record
Recording Date: 06/27/2011
Document Type: Notice of Default
Foreclosure Record
Recording Date: 01/24/2011
Document Type: Notice of Rescission
Foreclosure Record
Recording Date: 12/03/2009
Document Type: Notice of Sale
Foreclosure Record
Recording Date: 06/03/2009
Document Type: Notice of Default
What are these people going to do now? The $570,000 they put down is gone. They finally got booted out of their fancy house, so now they are broke, they have bad credit, and they have a sense of entitlement that will never be satisfied again. The good times would have been good, but I wouldn’t trade places with them now.
Corona Del Mar Overview
Median home price is $1,253,000. Based on a rental parity value of $804,000, this market is over valued.
Monthly payment affordability has been improving over the last 1 month(s). Momentum suggests unchanging affordability.
Resale prices on a $/SF basis declined from $753/SF to $740/SF.
Resale prices have been falling for 1 month(s). Price momentum suggests falling prices over the next three months.
Median rental rates increased $216 last month from $3,175 to $3,391.
Rents have been rising for 12 month(s). Price momentum suggests rising rents over the next three months.
Market rating = 1
Proprietary OC Housing News home purchase analysis 
7 MUIR BEACH Cir Corona Del Mar, CA 92625
$2,800,000 …….. Asking Price
$1,900,000 ………. Purchase Price
7/22/2002 ………. Purchase Date
$900,000 ………. Gross Gain (Loss)
($152,000) ………… Commissions and Costs at 8%
============================================
$748,000 ………. Net Gain (Loss)
============================================
47.4% ………. Gross Percent Change
39.4% ………. Net Percent Change
4.0% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$2,800,000 …….. Asking Price
$560,000 ………… 20% Down Conventional
4.47% …………. Mortgage Interest Rate
30 ……………… Number of Years
$2,240,000 …….. Mortgage
$563,478 ………. Income Requirement
$11,310 ………… Monthly Mortgage Payment
$2,427 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$700 ………… Homeowners Insurance at 0.3%
$0 ………… Private Mortgage Insurance
$120 ………… Homeowners Association Fees
============================================
$14,557 ………. Monthly Cash Outlays
($1,722) ………. Tax Savings
($2,966) ………. Equity Hidden in Payment
$924 ………….. Lost Income to Down Payment
$370 ………….. Maintenance and Replacement Reserves
============================================
$11,162 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$29,500 ………… Furnishing and Move In at 1% + $1,500
$29,500 ………… Closing Costs at 1% + $1,500
$22,400 ………… Interest Points
$560,000 ………… Down Payment
============================================
$641,400 ………. Total Cash Costs
$171,100 ………. Emergency Cash Reserves
============================================
$812,500 ………. Total Savings Needed
——————————————————————————————————————————————-
This property is available for sale via the MLS.
Please contact Shevy Akason, #01836707
949.769.1599……
sales@ochousingnews.com…..
We're sorry, but we couldn't find MLS # S683075 in our database. This property may be a new listing or possibly taken off the market. Please check back again.
 |
$3,300,000 15 ROCKY POINT Rd |
0.06 miles 6 bd / 5.5 ba 6,700 Sq. Ft. |
|
 |
$4,199,000 2 SAN SEBASTIAN |
0.2 miles 5 bd / 6.5 ba 7,275 Sq. Ft. |
|
 |
$3,000,000 9 CRESTWOOD |
0.28 miles 5 bd / 6 ba 7,302 Sq. Ft. |
|
 |
$3,499,000 7 NARBONNE |
0.29 miles 6 bd / 5.5 ba 6,400 Sq. Ft. |
|
 |
$2,999,900 11 NARBONNE |
0.31 miles 4 bd / 5 ba 6,459 Sq. Ft. |
|
 |
$3,950,000 3 YORKSHIRE |
0.46 miles 4 bd / 4.5 ba 7,024 Sq. Ft. |
|
 |
$2,699,000 5 TRAFALGAR |
0.53 miles 5 bd / 6 ba 5,675 Sq. Ft. |
|
 |
$1,999,990 37 VERNON |
0.61 miles 5 bd / 4.25 ba 4,500 Sq. Ft. |
|
 |
$6,000,000 4 SAILVIEW |
0.62 miles 5 bd / 7 ba 7,367 Sq. Ft. |
|
 |
$2,995,000 3 BELMONT |
0.63 miles 4 bd / 4.5 ba 4,850 Sq. Ft. |
Wouldn't you be embarrassed to overpay by $100,000? Only fools buy houses without knowing neighborhood values. Don't be a fool. Don't suffer the pain of an underwater mortgage. The surest way to lose your house is to overpay for it. Our reports identify overvalued and undervalued neighborhoods. Use it to broaden or narrow your search area. Savvy buyers work with us to find bargains. We've saved thousands from financial ruin. Let us save you too. If you want peace of mind while shopping for your next home, sign up for our monthly market newsletter.
15 Responses to “HELOC Abuse at twenty-six year low”
Sorry, the comment form is closed at this time.
The house I purchased needs new windows and sliding patio doors.
It’s not just aesthetics. They really need to be swapped out because they’re from 1987 and are the cause of some energy loss.
But the hell if I’m going to change my purchase money rule position in CA so that I can inflate my loan balance to have the new windows RIGHT NOW. The gas/electric bill & any tax rebate savings just isn’t that substantial. Eff that noise. So I’m socking away cash to do that project…..not now, next year.
So I imagine demand is still there for all of these wonderful things like kitchen remodels, SUVs, and vacation to Hawai’i, etc. Is it the end of the world if the actionable part of such market demand is being deferred? I think not.
The result is simply a re-shuffling and shifting of resources (labor, capital, etc.) in the economy in view of past malinvestment.
But if one listens to the news media and politicians they’d have you believe that “consumer spending” is the driver of all things, so unless we’re doing exactly that – spending our discretional income plus 15% on credit, then we’re totally effed as a country. In short, savers a royal assholes and anti-American.
Uh… the US monetary system (debt) is a wealth-transfer mechanism which functions poorly by savings.
Speaking of savers…
just out from David Rosenberg: The interest savers would have collected if Bernanke had not pushed rates lower amounts to $400 billion per year ($1.3 trillion since 2008).
Now calculate for me please, the wage income lost since 2008 if Bernanke had NOT pushed rates lower.
I’ve “lost” a lot of money in lower interest being paid, but I’ll take that loss if it means my wage income remains strong.
Plus, lower rates are a tax on seniors primarily (who have a disproportionately large amount of cash savings). This is fair considering our current tax dollars are paying for their SSI checks and their Medicare. Let’s keep taxing this group to balance things.
There is an element of self-delusion that comes with chasing NOMINAL numbers. Just say’n
Wow, financial market headlines today touting 30yr mort now 3.88. LOL
buying @3.88 vs 6.25 = 1) higher cost basis 2) larger principle 3) diminished mort interest tax benefits
I would love to know what theses epic HELOC abusers spent the money on. Maybe they could do a 60 Minutes segment and have an interview and blur out their faces. This would be truly fascinating. These people gamed the system and stole more than even the most brazen bank robber with almost zero consequences. I must have missed that class in college, evidently many others didn’t!
How do you know it was not a business owner who used the money to keep his business afloat and employ dozens of people?
With the limited amount of capital available to main street businesses, I would not be surprised if this was the only form or financing for many small business over the last five years.
Just saying….we have no idea….
Bad business judgement, if so. It makes only so much sense to borrow huge amounts of money to keep your business afloat.
If you are borrowing into an economic updraft and a trend that favors your line of business, it can be sensible, especially at the low interest rates many were getting on HELOCS.
But, too often, this kind of borrowing is triggered by desperation and panic as a floundering owner in an outdated industry flails about hoping for miracles. Just give him another year, he thinks, as sales trend down and debts mount. I know many entrepreneurs and see many seized with gambling fever, especially when business is heading south.
I would sure like to know, too.
For example, take today’s writeup. Total equity withdrawal = $1,770,000.
I think I would have a hard time spending that amount of cash.
How many Hummers can you buy, vacations can you take, and massage parlors can you visit?
Maybe they laundered all that money and disappeared?
I wonder if any bank (also wondering where the money went) ever hired a forensic accountant and went after any of these people?
Am I being foolish by earning a living the old fashion way (job) and saving for the future?
I believe that the one action rule with a non-judical FC, allows only the HELOC of $500,000 be outstanding. My info says HELOC are usually settled for 20% to 30% if it has not been sold to a collection agency.
You won’t see a high percentage of cash refi’s for a long time.
In my book the guy made out like a bandit.
+2,600,000 first loan
- 1,900,000 purchase price
+ 500,000 HELCO
____________________
+1,200,000 gross profit if the HELOC doesn’t come after him
- 150,000 to cover HELOC settlement
$1,050,000 net profit in 10 years plus over 2 years of free housing without RE taxes and almost no personal money at risk.
My bet is at least half million (tax free has already been socked away for this rainny day). Who needs good credit when you can pay with cash?
The banks and squatters are asking for bailout. Why should my family do without to pay for their party and folly? Or maybe I was the fool not to join the party.
They seem to have been averageing about $200,000 a year in loans which makes sense if they thought prices were only going to go up. Those were the days.
How can you tell when you’re at the top of the market? When your wife leaves you, ha ha.
Remember when you said Debt is Reality? I stopped doing refi’s for trips to Russia, apartments for relatives in Moscow, mall shopping sprees etc. when I had to instead pay for her attourney and spousal support. The last refi was to finance a forensic accounting in 2006, and I got a 15 yr fixed @ 6.35%. I am left with an abiding hatred of forensic accounting and Judge Marion Nelson at LA Superior Court. And all things Russian.
The HELOC borrowing lost has been replaced by 0% down 7 year car loans on $40K cars for people who barely make that much, and credit card borrowing.
Credit card lending increased 54% from 2010 to 2011.
There is more derivatives exposure than even in 2008.
All anyone “learned” from 2008 is that if you are a too-big-to-fail lender and major political donor, the government will rescue you, and that when one Ponzi Pit blows, go fund another one. Those would be car loans, college debt, and credit cards. Most of these loans are being extended to unqualified borrowers. The car loan bubble will blow up in our faces as something like 80% of the cars being sold with these loans are “gas guzzlers” that will lose resale very quickly as gas prices continue to ratchet up.
The United States has become a total idiocracy.
LL above, I first could not believe credit card lending in any form or segment increased 54% in this unsteady and dangerous time, not in ONE year certainly. Well, thanks to your posting and google’s staggering ability (magic?) here’s the ugly true details:
http://news.equifax.com/index.php?s=18010&item=126087
So it was only the worst possible subprime credit risks that increased their indebtedness by that amount in ONE YEAR. How could the banks even have enough overreaching bankers to go out, get those loans sold and booked, to reach those huge production jumps, let alone have so many subprime fools jump aboard this sinking ship. So what could go wrong? We have eleven trillion in consumer debt and fifteen trillion in federal debt owed by those same consumers/taxpayers and then all the state level government debt (doubled in last ten years). Each of the Equifax factual items listed in the link are frightening enough, but together, well, what do those do for Orange County’s housing value forecasts, for example? People (new buyers especially) need down payments, less debt, cheaper homes to get FHA. The banks have utterly no limits on their extraordinary risk taking; if they stopped (as the Fed should stop this insanity of huge debt to bad credit risks) think what that would do to the consumer economy. No, these subprime credit borrowers aren’t tapping their homes for value any more, they’re using “free” money on 26% interest credit cards as if it were an “extra salary”. Just when one hopes there is an adult in charge at the Fed or the banks, they pull this irresponsible debt bubble risk again.