Here we go again. Are we trying to outdo ourselves with Casino Capitalism and Crapshoot Politics?
The Federal Reserve, representing the banking system and in league with the Treasury, is trying to induce consumer demand by encouraging more borrowing against an over-leveraged housing market that they re-inflated with Quantitative Easing. It makes rational sense to borrow cheap money against assets, that is, until the insolvency of the system crashes again, leading to an even steeper deflationary de-leveraging that the Fed and the Treasury will be powerless to stop. Are we convinced the government will save us again from this folly? There’s another word for bailouts: it’s called “wealth destruction,” and someday the wealth runs out, even for the USA.
This is all a game of smoke and mirrors. An unnecessary game. From the WSJ:
Borrowers Tap Their Homes at a Hot Clip
Helocs Jumped 8% in the First Quarter
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.
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. Inside Mortgage Finance noted the bulk of the home-equity originations were Helocs.
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.
In 2013, lenders extended $59 billion of Helocs and home-equity loans. The last pre-boom year near that level was 2000, when lenders extended $53 billion, according to Inside Mortgage Finance.
“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.
Unlike home-equity loans, in which the borrower receives a lump sum, borrowers can draw on Helocs as needed. They can sometimes take a tax deduction on the interest from the credit line.
Some individual banks have seen their Heloc originations rise much faster than the national average. Bank of America Corp., which has increased marketing for Helocs, said customers opened $1.98 billion in Helocs in the first quarter, up 77% from the first quarter of 2013. Matt Potere, who leads Bank of America’s home-equity business, said many customers are taking out Helocs to pay for home-improvement projects that were delayed during the housing bust.
“The driver is increased customer demand,” Mr. Potere said. “It’s an effect of higher consumer confidence and improving home values.”
Wells Fargo & Co. said data for the first quarter weren’t immediately available, but the company’s Heloc and home-equity loan originations were up 33% last year to $8.56 billion, and are running strong this year.
“That is the No. 1 product that customers want,” said Kelly Kockos, Wells Fargo senior vice president of home equity.
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.
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.
“Relative to where they were, lenders are still very conservative,” said Mr. Gumbinger. “Will the excesses of yesterday return? Only time will tell.”
As home prices declined during the housing crisis, lenders reined in Helocs by freezing the amount of credit available and restricting new credit. But now that home prices are appreciating and home equity is growing again, lenders are reversing course. According to the Federal Reserve, net household equity stood at about $10 trillion in the fourth quarter of last year, up 26% from the prior year.
“It’s really about the stabilization of the real-estate market and property values going up. It gives us more comfort as to the value of the homes—the equity is there and the client profiles look strong,” said Tom Wind, executive vice president of home lending at EverBank, based in Jacksonville, Fla. Starting in June, EverBank will offer Helocs for the first time since exiting the market in December 2007.
Some lenders are even bringing back “piggyback” loans, which serve as a second mortgage and cover part or all of the traditional 20% down payment when purchasing a house. Piggybacks nearly vanished during the mortgage crisis.
Banks have been emboldened to originate new Helocs in part because new regulatory requirements completed this year and last year make it less burdensome to do so. And in an era where interest rates are expected to rise in the future, some lenders say they prefer Helocs over some other home-equity products because interest rates on Helocs rise as interest rates rise, making the products potentially more profitable.
For consumers in need of cash, Helocs offer an alternative to “cash-out refinancings” in which a homeowner taps equity by taking out a new loan that is bigger than the existing mortgage.
Many homeowners have fixed-rate mortgages of between 3% and 4%, and many can’t get loans lower than that now.
Ian Feldberg planned to open a $200,000 Heloc this week with Belmont Savings Bank to help pay his son’s college tuition. The medical-device scientist purchased his home in Sudbury, Mass. for a little over $1 million in 2004, and estimates that its value dipped as low as $800,000 during the financial crisis. However, after applying for the line of credit, he found that its value had completely recovered.
“I’m very pleased about that. My options for tuition fees were either that or to cash in on my pension prematurely,” he said.
Navy Federal Credit Union, the largest credit union in the U.S. with more than $58 billion in assets, is moving aggressively, letting borrowers withdraw up to 95% of the value of their homes with Helocs, said Richard Morris, vice president of investor relations and equity lending. Navy Federal’s Heloc originations were $78.9 million during the first four months of this year, up 59% from the same period a year earlier.