HELOCs are making a comeback. Banks are offering those willing to become loanowners free money at very low rates, so borrowers are taking the money. Last time around, this was an open invitation to theft as borrowers extracted over a trillion dollars in mortgage equity withdrawal which they didn’t pay back. For now, banks are being more conservative in their lending, but since lenders will become more aggressive as they become more confident in rising house prices, there is a risk that rampant HELOC abuse may return. If it does, it could easily reignite the same desires that inflated the housing bubble leading to a painful crash and more taxpayer bailouts. Everyone who doesn’t want to subsidize their neighbors reckless spending should be wary of a return to a HELOC dependent economy and lifestyle.
Americans Are Tapping Into Home Equity Again
Published: Friday, 8 Feb 2013 | 11:04 AM ET
By: Diana Olick — CNBC Real Estate Reporter
Nearly 11 million borrowers are underwater on their mortgages, owing more than their homes are worth, according to CoreLogic, and yet home equity lines of credit are suddenly on the rise again.
During the housing boom of the last decade Americans withdrew over $1 trillion in home equity. They did it through cash-out refinances, home equity loans, and home equity lines of credit. The latter allowed them to use their homes like an ATM. They spent the money on cars, televisions, vacations and fancy home upgrades. It was seemingly endless equity, until suddenly that equity was gone.
Did you realize it was a trillion dollars? We all knew it was bad, but a trillion dollars? No wonder the economy is sputtering right now.
It was easy to recognize the HELOC abusers back in 2005 and 2006. If you drove down a residential street, you can tell by the quality of the houses and the cars in the driveway the general level of income in a neighborhood. 
Oftentimes you could drive by a house and see two new luxury cars in the driveway even in less affluent neighborhoods. This was a classic sign of HELOC abuse. Most people would park their luxury cars in the garage, but if the garage is full of useless crap bought with HELOC money, the owners would be forced to park their fancy cars outside. Some may not have had garages full of HELOC booty. Some probably parked these outside to show off to the neighbors. Losers with a capital “L.”
“Home prices are definitely a factor” in the recent rise home equity lines of credit, said Brad Blackwell, an executive with Wells Fargo Home Mortgage. “As they increase, people have more available equity.”
(Read More: New Housing Fears: Home Prices Are Rising Too.)
As I noted, One man’s mortgage debt is an entire neighborhood’s equity. Super low interest rates allow borrowers to bid more, and limited inventory forces them to if they want to acquire a property.
Blackwell also pointed to increased consumer confidence, meaning borrowers now feel better about their ability to repay these loans.
For those who used the borrowed money to pay off the loans, the Ponzi scheme can begin again. Ponzis don’t care about their income. What Ponzis need is the belief that they will be extended another loan to repay the first.
Both factors fueled a 19 percent jump in originations of home equity lines of credit at the end of last year, according to Equifax. In 2008, as housing was crashing, home equity line originations dropped 55 percent.
“Nationally we’ve seen a 31 percent increase in HELOC’s year-over-year,” said a spokesperson from JPMorgan Chase.
Ponzi theft is on the rise.
With home prices up 8 percent year-over-year in December, according to the latest reading from CoreLogic, homeowners are regaining home equity at a fast clip—1.4 million borrowers rose above water on their mortgages through the end of September. That number likely increased as price appreciation accelerated toward the end of the year.
Does this mean a return to the reckless equity withdrawals of the housing bubble? Likely not.
“I would guess that most of the current home equity line borrowing is quite prudent. We know that it is being very conservatively underwritten with plenty of equity,” said Guy Cecala, editor of Inside Mortgage Finance.
I would guess? I would guess the Ponzis are rejoicing their new-found income.
(Read More: Housing Already Shows Signs of a New Bubble.)
While it is too early to say exactly what borrowers are spending this new cash on, anecdotal evidence shows borrowers are largely sinking the money back into their homes.
What people spent the money on is the biggest mystery of the housing bubble.
“We are seeing more responsible uses today, like home improvements, education expenses or other major expenses that would be a more responsible use of a customer’s home equity,” Blackwell said.
The average home equity line in October of 2012 was just below $90,000 compared to October 2006, when lines averaged just over $100,000, according to Equifax.
Despite the recent surge, volume is still down dramatically from the height of the housing boom. Borrowers in 2012 took out a collective $7.2 billion in home equity lines through last October, compared to just over $28 billion in 2006.
(Read More: Why Home Builders Won’t Drop New Home Prices,)
These things always start out small, but once borrowers get a taste for free money, it usually escalates. People don’t realize how it effects them, and it’s usually not for the better. 
The numbers are expected to go up in 2013, not just because home prices are rising, but because interest rates are rising. With higher rates, borrowers will not want to give up their rock-bottom fixed rates to do cash-out refinances; rather, they will turn to home equity lines instead. While these lines usually carry variable rates, banks are now offering new products with fixed rates. Wells Fargo recently promoted a line of credit where a portion of the loan is fixed for up to three years.
“We clearly want to lend, and we want to lend to the types of needs that our customers have,” Blackwell added.
Banks want to enslave borrowers any way they can.
Will HELOC abuse come back in full force?
I don’t think we will see the same level of theft we witnessed last time around. During the housing bubble, lenders offered borrowers the ability to refinance at lower interest rates. This allowed borrowers to extract their equity often without increasing their monthly payments. From a borrower’s perspective, this really was free money. Since we are at the bottom of the interest rate cycle, borrowers won’t get lower interest rates to refinance and keep the same monthly payment. That means HELOC booty will have a cost this time around. If the borrowed money has a real cost, far fewer people will take it, and those that do won’t be able to extract near as much because they will face qualification barriers.
Gone are the days when you could make up an income number to justify the loan. That should curtail Ponzi borrowing which is the behavior that inevitably leads to a crash.
We will almost certainly see a continuation of debt consolidation loans on HELOCs. It makes sense financially to consolidate high-interest credit card debt on a low-interest HELOC; however, it is foolish to run up the credit card debt in the first place. Financing short-term consumption with long-term debt is never a good idea. Debt consolidation is a one-time fix for those who see the light and stop using their credit cards. It’s a terrible way to routinely plan finances.
I think most HELOC money in the future will go toward debt consolidation and home improvements, a tolerable though foolish use of consumer debt. Although I think all consumer debt is bad, the debt industry will continue to tout its benefits while they enslave another generation.
Over $500,000 in HELOC abuse
Today’s featured property is a short sale because the owner spent over $500,000 in mortgage equity withdrawal. Like many Ponzis of the housing bubble, he lived well beyond his means, and now he needs to get out from under his onerous debts.
- The house was purchased for $531,500 on 10/24/2002. The owner used a $424,950 first mortgage and a $106,550 down payment.
- On 1/21/2004 he refinanced with a $530,000 first mortgage and withdrew his down payment.
- On 9/27/2004 he obtained a $169,000 HELOC.
- On 9/12/2005 he refinanced with a $817,000 Option ARM with a 1% teaser rate.
- On 10/31/2006 he refinanced with a $865,000 first mortgage.
- On 3/9/2007 he opened a $105,000 HELOC.
- Assuming he maxed out the HELOC, the total property debt was $970,000, and the total mortgage equity withdrawal was $535,050.
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8 Saintsbury, Irvine, CA 92602 (MLS # PW13013434)
(all data current as of 5/24/2013)
| Price | $830,000 |
|---|---|
| Beds | 3 |
| Baths | 2 full, 1 half |
| Home size | 2,200 sq ft |
| Lot Size | 4,827 sq ft |
| Days on Market | 114; |
One Story Mediterranean ~~ 3 bedrooms, 2.5 bathrooms, with a 2 car attached garage on a 4,826 sq ft lot. Property features open kitchen with SolidGranite Countertops, Stainless Steel Appliances, and Counter top Seating. Open Family room with hardwood flooring, gas fire place, built-ins, andcustom blinds. Property has been beatifully landscaped in front and back yard. Property is located near multiple shopping and eatingopportunities.
Property Type(s): Single Family, Residential
| Last Updated | 1/31/2013 | Tract | Rutherford (ruth) (Rutherford (RUTH)) |
|---|---|---|---|
| Year Built | 2003 | Community | Northpark |
| Garage Spaces | 2.0 | County | Orange |
| Total Parking | 4 |
Listing information deemed reliable but not guaranteed. Read full disclaimer.
(view all details for MLS #PW13013434)
Proprietary OC Housing News home purchase analysis
$830,000 …….. Asking Price
$531,500 ………. Purchase Price
10/24/2002 ………. Purchase Date
$298,500 ………. Gross Gain (Loss)
($66,400) ………… Commissions and Costs at 8%
============================================
$232,100 ………. Net Gain (Loss)
============================================
56.2% ………. Gross Percent Change
43.7% ………. Net Percent Change
4.3% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$830,000 …….. Asking Price
$166,000 ………… 20% Down Conventional
3.59% …………. Mortgage Interest Rate
30 ……………… Number of Years
$664,000 …….. Mortgage
$172,140 ………. Income Requirement
$3,015 ………… Monthly Mortgage Payment
$719 ………… Property Tax at 1.04%
$225 ………… Mello Roos & Special Taxes
$208 ………… Homeowners Insurance at 0.3%
$0 ………… Private Mortgage Insurance
$280 ………… Homeowners Association Fees
============================================
$4,447 ………. Monthly Cash Outlays
($676) ………. Tax Savings
($1,029) ………. Equity Hidden in Payment
$193 ………….. Lost Income to Down Payment
$124 ………….. Maintenance and Replacement Reserves
============================================
$3,058 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$9,800 ………… Furnishing and Move In at 1% + $1,500
$9,800 ………… Closing Costs at 1% + $1,500
$6,640 ………… Interest Points
$166,000 ………… Down Payment
============================================
$192,240 ………. Total Cash Costs
$46,800 ………. Emergency Cash Reserves
============================================
$239,040 ………. Total Savings Needed
The property above is available for sale on the MLS.
Contact us for a comparative market analysis, a cost of ownership analysis, or information on how you can make an offer today!
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32 Responses to “Will HELOC abuse be as prevalent this time around?”
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Capital Economics: Rise in Household Wealth to Boost GDP Through HELOC Abuse
With the increase in home and equity prices, Capital Economics suggests net household wealth may be on its way to rising above pre-recession levels later this year, which will lead to a boost to GDP.
“This wealth effect should continue to boost the economy in future years too, although by not as much,” the analytics firm stated in a recent report.
Capital Economics forecasts the S&P 500 equity price index will end 2013 close to the current level of 1,500 and expects home prices to rise in the neighborhood of 5 percent. In turn, the growth in household wealth, the firms says, could lift GDP by around 0.7 percent.
“A rise in the S&P 500 index to 1,600 in 2014 and a further 5% gain in house prices may add 0.5% next year too,” the report added.
The most recent Flow of Funds report for Q3 2012 showed net household wealth grew to about $64.7 trillion. Capital Economics says the Q4 report, due March 7, is likely to show an increase of household wealth to around $65.1 trillion. At the end of 2007, net worth reached $66 trillion.
“Wealth would have increased by $4.8trn during last year as a whole, leaving it close to the pre-recession peak reached five years ago,” the firm stated.
The firm largely attributed the rise in wealth to the increase in stock market prices, with home value improvements being secondary.
“The rise in net wealth last year was mainly due to the 17% increase in equity prices boosting the value of equity-related assets by $3.6trn and, to a lesser extent, a result of the 8% gain in house prices raising the value of real estate assets by $1.0trn,” Capital Economics explained.
Though, the firm noted a rise in home values actually tends to lead to a larger increase in consumption spending compared to a rise in equity wealth.
With the added boost from increasing wealth, Capital Economics forecasts GDP will rise by 2 percent this year and by 2.5 percent next year.
“Our growth forecasts will need to be changed only if asset prices rise by much more or fall significantly,” the firm stated.
Loan Mods Continue to Fail Miserably
During the month of January, 14,500 homeowners received permanent mortgage modifications through the Home Affordable Modification Program (HAMP), while 53,100 homeowners lost their homes to foreclosure, according to the latest Housing Scorecard from the Obama administration.
At the same time, 14,500 homeowners entered into trial modifications through HAMP, and 72,500 homes entered the foreclosure process.
Proprietary modifications continue to outpace HAMP. HOPE Now reported 62,200 mortgage modifications completed in January.
Also in January, the Federal Housing Administration (FHA) completed 39,200 loss mitigation actions, and the Home Affordable Refinance Program completed 81,600 refinances.
Combined, HAMP, FHA, and HOPE Now have offered more than 6.1 million mortgage assistance actions since April 2009, while just over 3 million foreclosures have taken place.
“Making Home Affordable has directly helped more than one million homeowners avoid foreclosure and indirectly helped millions more by promoting critical changes in the way the mortgage industry assists struggling homeowners,” said Tim Massad, assistant secretary for financial stability at the Treasury.
Since its initiation, HAMP has provided more than 1.1 million homeowners with permanent mortgage modifications. These homeowners save an average $545 on their monthly mortgage payments.
About 87 percent of homeowners who enter the program receive a permanent modification, and about 94 percent of those are current on their modified loan after six months.
While HAMP claims fewer modifications than the private sector, the administration reports modifications through HAMP “continue to exhibit lower delinquency and re-default rates than industry modifications as reported by the Office of the Comptroller of the Currency.”
To me loans mods are the last affordability products. Even FHA is at least have to qualify that you can pay the 30-year fixed. Affordability products didn’t die in 2007, they just became loan mods.
“Affordability products didn’t die in 2007, they just became loan mods.”
That’s exactly what happened. It’s one of the many reasons redefault rates are so high. If you look at the terms of a typical loan mod and compare them to an Option ARM, they are very similar.
Both have a teaser rate with a recast at a later date, and both add the unpaid interest and fees to the loan balance.
True, and you have to keep in mind at whom these loan mods are directed – the “Goldilocks Borrowers.”
If you can afford your mortgage and other debt, but simply want to refinance at a much lower rate to improve your financials and encourage you to avoid strategic default, loan mods aren’t available to you.
If you bought or refinanced a house way beyond your then, or now current, means, then loan mods aren’t likely available to you.
But if you’re just right – you can’t afford your mortgage and other debt, but with a little breathing room for at least 2-5 years, you could get back on track, then you might be able to get a loan mod. It’s not going to save you though. Nope, that’s something you’ll have to do yourself…
If they are going to have a loan modification program, targeting the “Goldilocks Borrowers” is the only way to do it. If they just modified everyone’s loans, it would be too costly. If they gave assistance to those who don’t need it, it would be a waste of money, and if they give it to those with no hope, it’s also a waste. It’s of dubious value to the recipients, but better to them than anyone else, if you’re going to have the program at all.
If we had normal mortgage and HELOC rates and not these teaser rates we are currently experiencing, we wouldn’t have have this problem. Pre-bubble secondary mortgages were every expensive and many banks have restrictions on the LTV, credit, and income. If fact, for a lot of home sales the seller had to a little seller financing to close the sale. That really prevented a lot a borrowers from getting a HELOC.
The problem for anyone with so-called ‘home equity’ (or for hedge funds who’re parking boatloads of cash in SFR’s) is the fact that the monetary system valuations are based-on is entirely faith based.
Venezuela Launches First Nuke In Currency Wars, Devalues Currency By 46%
VENEZUELA DEVALUES FROM 4.30 TO 6.30 BOLIVARS
VENEZUELA NEW CURRENCY BODY TO MANAGE DOLLAR INFLOWS
CARACAS CONSUMER PRICES ROSE 3.3% IN JAN.
And that, ladies and gents of Caracas, is how you just lost 46% of your purchasing power, unless of course your fiat was in gold and silver, which just jumped by about 46%. And, in case there is confusion, this is in process, and coming soon to every “developed world” banana republic near you.
http://www.zerohedge.com/news/2013-02-08/venezuela-devalues-its-currency-32
Venezuelan gold bugs are vindicated today.
I bet a few venezuelans joined the gold bug camp.
The experiment in fiat currency has failed. Peter Schiff and others have created gold backed debit cards as the solution. Now it is a matter of shedding normalcy bias and embracing the market forces toward gold backed currency.
You’re wasting your time. No country will ever return to a gold standard. Ever.
If enough people embrace gold-backed credit cards, it won’t matter. People should be able to select their currency of choice. With gold-backed credit cards immediately exchangeable into whatever local currency is used, people won’t be forced to keep their currency in the local denomination. This has potential to put pressure on central banks not to do the kind of crap Venezuela just did. If everyone in Venezuela had gold-backed credit cards, Chavez’s move to steal their wealth would have failed.
You’re partially correct. Governments will fight this to the end. Citizens of the world, and eventually even yourself, will grow weary of the debasement and embrace gold. The free market is choosing this.
Saving in gold, I can watch real estate continue to fall in real terms. Those saving in dollars must watch real estate rise in nominal terms and are forced to buy now or be priced out forever. It’s a matter of perspective=)
Warren Buffett’s father, Howard Buffett, knows that human freedom rests on gold redeemable money. IrvineRenter just outlined exactly why – governments and central banks are unable to claw at your savings to pay for their profligate spending.
Savings are representative of your humanity ie past productivity or hours of your life. If they can debase your savings, they can essentially debase YOU.
Moving to a gold standard does require we deal with our can kicking, but it is the most prudent manner with which to deal with the pain.
Don’t ever say never !
“…Savings are representative of your humanity ie past productivity or hours of your life. If they can debase your savings, they can essentially debase YOU…”
Agreed, but I don’t have to wait to accumulate savings and then watch it be taken from me through debasement. Our federal and state government take over 30%+ of every dollar my household earns right now. Today! What’s more invasive than that?
You can’t earn your way to wealth because income taxes are just too high. Tax policy makes it so that the only way to build real wealth is to own assets that rapidly appreciate in value. Hence people get obsessed with California real estate. The only other way to to build a company that grows rapidly and the stock price goes orbital. That’s why we get reckless risk taking by everyone on Wall Street. Wealth is only attainable by birth or by recklessness.
You can only save in gold if you’re paid in gold. If, alas, you’re paid in dollars, like most of us, then you can only save in dollars. You can buy gold with your saved dollars, of course, and then at least they stop devaluing at that point. That’s something, I guess.
What is Germany scared of? Bundesbank to retrieve $200bn of gold reserves from central banks in Paris and New York
http://www.thisismoney.co.uk/money/markets/article-2263254/Bundesbank-retrieve-200bn-gold-Paris-New-York.html
Nevada is considering purchasing $150 million in bad mortgages
Feb 11 2013, 12:01PM
Citing the overhang of distressed homes as a major stumbling block to recovery, a Nevada official is proposing a new program for reducing it. According to the Associated Press, Bruce Breslow, Director of Nevada’s Department of Business and Industry, wants to use federal and other funds to purchase about $150 million in delinquent mortgages and substantially reduce the principal balance.
Under the proposed Nevada Means Home Retention Program (Nevada Means Home is the state song) would create a non-profit organization which would use funds from the national servicers settlement and the Hardest Hit Program to purchase pools of mortgages at a 30 percent discount and restructure them at a balance that reflects actual collateral value. Nevada is one of five states that gets Hardest Hit Funds and is already running several programs with the money including a modification program, and both principal reduction and principal curtailment initiatives.
The program appears to differ from those proposed recently by counties in California, Illinois and Massachusetts in that the loans would be purchased rather than taken through eminent domain and the state would hold the loans rather than immediately reselling them.
Breslow told a legislative hearing that the foreclosure inventory is keeping homebuilders from moving into Nevada and that current foreclosure prevention programs are not reaching many homeowners who tend to avoid answering the phone or reading mail once they become delinquent. He estimated there were some 52,000 homes in some stage of foreclosure in Nevada which, according to RealtyTrac, was the number one state for foreclosure activity for over 50 straight months. It still ranks in the top five. Breslow said banks should be dealing with these properties but are not doing so.
Homeowners could not choose to participate; the non-profit would buy loans in the same manner as other bulk purchasers and then inform homeowners of the program. Breslow said that unlike other programs the reductions in principal would be significant enough to make a difference in the homeowner’s carrying capacity. He estimated that there would be only enough money to help 700 or 800 homeowners initially but as those homeowners pay on their mortgages and replenish the fund the non-profit could increase its reach.
The legislature has asked for a more comprehensive plan for the proposed non-profit and Breslow estimates that the program, if approved, would not be in place for at least six months.
Let’s hope this idea dies along with the other stupid ones proposing principal reductions.
So, the Left successfully fought-off any changes to Social Security and Medicare in the last tax & spend fight, and now the Right is refusing to accept that any dollar can be cut from building our weapons of mass destruction. The Right is so scared of military industrial complex cuts, that they’re open to more “revenue.”
The mortgage interest deduction survived the last round mostly (all deductions were limited in the last deal by re-instituting the Pease phase-down for higher earners). Will it survive further modification in this latest round of “As the Tax & Spend Congress’ World Turns”?
I believe it will survive. They can just print the difference as long as faith in the US dollar remains.
I think they will slowly chip away at it by introducing new caps and lowering phase out thresholds. They won’t attack it directly because it’s too politically charged.
Don’t you dare touch our mortgage interest deduction, readers say
The money shot:
“One reader, for example, wrote that she’s a single woman with an income of about $30,000 a year and a mortgage balance below $100,000. Nobody’s seriously proposing taking her tax deduction away, but she’s alarmed that anyone’s even talking about a cap.”
This woman is too ignorant to realize she doesn’t make enough money to benefit from the deduciion. Ignorance among lower wage earners is the only reason I can think of for the deductions continued support by them.
The housing lobby (NAR and banks) is pretty powerful. I’m expecting some sort of VAT tax. It will start real small like 2%.
Yeap – just like the federal income tax. It started with the effect and declared intention that it would be a small amount (< 10%) and only truly rich people would pay it (top 1% of earning households). Look where it is today…
All government programs start small and seek to grow like a weed. Taxes are the easiest programs to grow because every congressman wants to spend more money.
I think most people go into a HELOC expecting to be the “prudent” ones. But the big change of heart happens at the hands of agressive salespeople. You can talk to a lender about taking out “only” $15-$20k, but they’ll act shocked and say, “Just that much? I can get you 10x that amount, easy! With today’s low rates, there’s no better time to etc. etc. etc…” Before they know it, these people are walking out the door with a fat HELOC, just like a car buyer drives off the lot with a top-of-the-line model instead of the “economical” car they promised themselves they’d buy. Whether you’re a young family just starting out, or you’re retired and your house is paid off, the pushy lenders will do whatever it takes to get people into the biggest loan possible. They get their fees and commission, and the borrower leaves with a lot of money, and a lot of debt. But hey, there’s a sucker born every minute!
If I wouldn’t end up paying for it all in a massive bailout, I would probably just shake my head in disbelief at the foolishness of some people. But with out current bailout expectancy, these people now have a direct conduit to my pocketbook, and there isn’t anything I can do about it.
Yep. The only way to put an end to this would be no bailouts. It’s amazing how the finserv industry gets this special treatment. Imagine if an American auto company got a bailout because they stopped being competitive and made crappy cars for too long. Oh wait…
there is something you can do.
the bailing out will be paid via rising prices. Inflation is the hidden tax that majority of voters are not intelligent enough to understand. If I were president (and an asshole), I would use inflation (while touting my compassion for the poor) as the path of least resistance to pay for the overspending.
citizens can mitigate the effects of the inflation by owning physical gold coins or getting one of these gold backed debit cards.
You just described FDR’s presidency, except that he attempted to ban owning gold….