We're back...... Using home equity as ATM's!!!!

User Forum Topic
Submitted by flu on February 8, 2013 - 11:05am

Weeeeeeeeeeeee.................Moral Hazard????Lol....

http://finance.yahoo.com/news/americans-...

Gotta love america... spend spend spend....

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.
"Home prices are definitely a factor" in the recent rise home equity lines of credit, said Brad Blackwell, an executive with Wells Fargo (WFC) Home Mortgage. "As they increase, people have more available equity."

Blackwell also pointed to increased consumer confidence, meaning borrowers now feel better about their ability to repay these loans. 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 (JPM).
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.
(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.
"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,)
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.

Submitted by spdrun on February 8, 2013 - 11:06am.

Plenty of people own their homes for cash or have low debt-to-value ratios -- what's wrong with having say 50-60% of equity or so available to pull out?

Submitted by flu on February 8, 2013 - 11:47am.

spdrun wrote:
Plenty of people own their homes for cash or have low debt-to-value ratios -- what's wrong with having say 50-60% of equity or so available to pull out?

Americans love to spend on credit. That's the problem.

Submitted by spdrun on February 8, 2013 - 11:57am.

Regardless, as long as the total equity withdrawal is limited to a fraction of current value that doesn't approach (or exceed!) unity, then they shouldn't have a problem selling or renting out in case of financial hardship.

Submitted by flu on February 8, 2013 - 12:07pm.

spdrun wrote:
Regardless, as long as the total equity withdrawal is limited to a fraction of current value that doesn't approach (or exceed!) unity, then they shouldn't have a problem selling or renting out in case of financial hardship.

Theory is nice... in textbooks.

A lot americans take money out to buy crap that don't produce income.

Submitted by spdrun on February 8, 2013 - 12:12pm.

So the bank will be able to foreclose at a profit to itself, same as was done in pre-Bubble days.

Submitted by flu on February 8, 2013 - 12:18pm.

spdrun wrote:
So the bank will be able to foreclose at a profit to itself, same as was done in pre-Bubble days.

Good theory... But it's theory... How many RE did you purchase recently that were FC/short sale, if you don't mind me asking?

Submitted by spdrun on February 8, 2013 - 12:21pm.

Have offers in the process on two as I write this. If anything, foreclosures are selling for above appraisal in a lot of areas, and I don't see a lot of downward pressure on prices, so 50% of appraisal should allow banks to sell off REO's at a profit.

Submitted by flu on February 8, 2013 - 12:29pm.

spdrun wrote:
Have offers in the process on two as I write this. If anything, foreclosures are selling for above appraisal in a lot of areas, and I don't see a lot of downward pressure on prices, so 50% of appraisal should allow banks to sell off REO's at a profit.

So basically none so far...

Submitted by spdrun on February 8, 2013 - 12:36pm.

What's your farkin' point?

Are you expecting prices to drop 40-50% below current values on REOs in the foreseeable future? If yes, then the HELOCs are a bad thing. If no, then the banks are making a rational decision.

The previous problem was different, caused by people being allowed to borrow nearly ALL (or more than all) of the home's value.

Submitted by heywood on February 8, 2013 - 12:39pm.

Point is people are wasting their money and will expect the govt to bail them out when they want to retire down the road. People are stupid!

Submitted by spdrun on February 8, 2013 - 12:47pm.

Horseshit -- your logic could be applied to any asset. Should people not be allowed to pawn their cars or their jewelry so they "have enough for retirement?" What is considered "enough?"

Why should someone with 100% equity in their home be required to sell it to start a business. If anything, lack of available credit (with L-to-V percentages within reason) will just help those who are already rich and hurt the little guy.

And as far as government retirement pensions, Social Security is a system where people GET BACK WHAT THEY PAID INTO IT. I have absolutely no problem with such a system, and in any case, living on SS isn't exactly living high on the hog. Isn't is something like $15k/yr?

Submitted by bearishgurl on February 8, 2013 - 12:55pm.

..."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....

(emphasis added)

This isn't very much less home equity than the average amount which was removed in 2006! But I do agree with spdrun that values aren't likely to decline in the future in CA coastal counties (ESP the well-established areas) ... don't know about other parts of the US.

For a "free and clear" owner (or one with over 50% equity) on a property worth at least $450K, I can see borrowing for home improvements in areas in which sold prices will bear these investments. But I just don't see the prudence of borrowing for educational purposes for child(ren) as it is likely to leave the parent close to or at retirement with an extra ~90K (+?) to pay back on their homes without the improvements to make their properties more salable for a higher price.

Due to the fact that many CA college graduates are now going to have to relocate to find work in their field that pays a living wage, should today's parent expect their ex-student-children (whom they borrowed for) to help them pay back their HELOC while supporting their own families in other counties/states??

I don't see this happening. Meanwhile, after college graduation the parent is likely 55-65 years old and often left behind without enough monthly income to keep the payments up on their adjustable-rate HELOC in a possibly rising-interest rate environment.

I suspect many parents are falling for this trap to keep their kids from taking out (the recently highly-publicized) non-dischargeable (variable-interest) student loans at a 6.5%+ (current) interest rate.

But this practice could very well leave THE PARENT(s) without a home when they are on a fixed-income and least able to pay for one, cuz I don't see their kids coming to the rescue for them :=0

Submitted by SK in CV on February 8, 2013 - 12:55pm.

I hope no one is using helocs or cash out refi's so that they might have cash on hand to buy additional investment properties. That would be so irresponsible. Kinda like fueling the bubble.

Submitted by spdrun on February 8, 2013 - 1:01pm.

Assuming that they're keeping skin in the game on each property and initially paying cash, how is serially buying investment properties using lines of credit any worse than having cash on hand and paying 20-25% down for them?

Answer: it's not. And as long as rents exceed monthly expenses by a tidy margin, it's a relatively safe thing to do provided that the credit lines can be converted to fixed-rate loans within a reasonable time.

Flipping would be fueling the bubble. Buying for rental income and remortgaging below purchase price is just good business sense.

Submitted by paulflorez on February 8, 2013 - 1:06pm.

There should be less restrictive HELOCs which base the high price off of average appreciation over several decades (more conservative estimate) but let you spend it on whatever you want and then HELOCs which take whatever the appraiser says but requires oversight so that you invest in something that will actually improve your financial situation (home improvement, pay off higher interest student loan debt, etc).

Or more generally, something that keeps people from at least directly using equity to buy junk that only depreciates in value.

It's obvious that the consequences of unbridled freedom of credit for the individual cannot be limited to the individual. When the economy tanks, it affects even those who do not abuse credit and make smart financial decisions. Reasonable limitations should be put in place and more oversight is definitely needed. While I'm somewhat happy my home value is going up, I'm actually more worried about another bubble developing in this more-demand-than-inventory environment. I'd rather have slower growth of my home value and economic stability over the long term.

I'm tired of this attitude that short term gains are worth destroying long term viability. It destroys households, businesses and seriously threatens our economy.

Submitted by bearishgurl on February 8, 2013 - 1:16pm.

Good post, paulflorez.

I just don't see how it's possible for a lender to "police" what a borrower does with his/her HELOC proceeds.

The only "reasonable limitations" that I know of in "technically" non-purchase-money RE lending is in the case of a construction loan, where a lender will release to the general contractor only that portion which is now due for work completed or materials to be purchased.

A typical construction-loan borrower can't use this type of loan as he wishes and doesn't usually have direct access to the proceeds.

Submitted by livinincali on February 8, 2013 - 1:41pm.

bearishgurl wrote:

I just don't see how it's possible for a lender to "police" what a borrower does with his/her HELOC proceeds.

I personally don't think lenders should police what you do with the money. I do think the lenders should establish the interest rate at a level that corresponds with the risk. Of course when you have the tax payers to bail you out risk pricing goes out the window.

The problem with lending these days is nobody bothers to price the risk anymore. Everyone expects the tax payer bailout. If you actually made the lenders eat their losses when things went bad than you'd probably see HELOCs with 10% interest rates rather than 5%.

Submitted by spdrun on February 8, 2013 - 1:43pm.

There should be less restrictive HELOCs which base the high price off of average appreciation over several decades (more conservative estimate) but let you spend it on whatever you want and then HELOCs which take whatever the appraiser says but requires oversight so that you invest in something that will actually improve your financial situation (home improvement, pay off higher interest student loan debt, etc).

That makes zero sense. If the less restrictive HELOC is based on average appreciation going forward, then people could borrow MORE than the more restrictive HELOC (which is based on a % of current appraised value). Shouldn't this be the other way around?

Submitted by no_such_reality on February 8, 2013 - 1:47pm.

Hey, it's their house, they can spend it any way they want.

They also can just STFU when they can't afford the payments and the bank comes and takes it.

Submitted by spdrun on February 8, 2013 - 1:48pm.

^^^

Agreed. Perhaps include a default deed-in-lieu clause in case of x missed payments in a row in all new HELOC agreements.

Submitted by flu on February 8, 2013 - 4:00pm.

SK in CV wrote:
I hope no one is using helocs or cash out refi's so that they might have cash on hand to buy additional investment properties. That would be so irresponsible. Kinda like fueling the bubble.

Why? I think that would be a great idea.. afterall, everyone else did it...i love this....First time, it was accidental.. second time it's intentional... Now we really can join the party....

Submitted by flu on February 8, 2013 - 4:01pm.

no_such_reality wrote:
Hey, it's their house, they can spend it any way they want.

They also can just STFU when they can't afford the payments and the bank comes and takes it.

Part 2 however is never gonna happen... there is no sense of personal accountablity in this country. Remember, it's always the bank's fault. The bank made me do it... yeah, that's right....

I couldn't stand no longer being able to keep up with the jones, so I needed to leverage my home to buy my (insert name brand car here)...

Submitted by earlyretirement on February 8, 2013 - 6:54pm.

I said it before and I'll say it again. The VAST majority of the people out there vastly overestimate their investment skills/abilities/timing.

I'm not saying everyone. But I'm comfortable with saying the vast majority of people out there. Everyone thinks they will do wonderful and their leverage/arbitrage play will work out for them. Especially in a stock market like this where it keeps going up. Everyone thinks they are some genius or guru. (Kind of like in the dot com days.... and the real estate bubble years).

Yet they won't admit they probably $hit their pants during the financial crash and the Great Recession. Where no matter how many times they tried to catch a falling knife their hands got awfully bloody. Nope. They won't admit that.

I've seen it time and time again over the last twenty years.

The people that leverage will always argue how they will always do smart and wise and fantastic things with the money that make it a smart or wise investment. Yes, sometimes it is. But lots of time it doesn't turn out well for them.

And in many of those cases, you'll never hear from them. They will tell you about their best investments but never about their worst investments or leverage plays that didn't turn out well.

Human nature....

Submitted by spdrun on February 8, 2013 - 6:54pm.

I creamed in my pants, repeatedly, when the Dow fell below 10k and the news about property values started breaking.

Submitted by flu on February 8, 2013 - 8:23pm.

spdrun wrote:
I creamed in my pants, repeatedly, when the Dow fell below 10k and the news about property values started breaking.

Why? So your 401k starts looking like a 201k... Big deal...Relatively speaking so does everyone else's....Some people's probably looks more like a 301k other's look more like a 101k.

Actually, I guess my life is based on relative to everyone else... If I get screwed, are there people that didn't get screwed as me? Yes... Ok.. Are there people that got screwed more then me? Yes... Ok... So relatively speaking I'm average screwed versus some people slightly less screwed versus some people much more screwed....

And frankly the way I've seen a lot of people handle their finances, I has to take some serious effort to get more screwed than a lot of people who are already pretty much screwed even before they started leveraging.

Look at all the people who the moment they start "feeling" slightly better, as soon as they can barely afford to make the bare minimum payment on an expensive car, or the moment that they have access to credit they spend it on a discretionary big ticket item and have virtually $0 savings and $0 net worth as a result. How much worse can you really do than that? I mean you have to be completely reckless to do worse than that...

Submitted by spdrun on February 8, 2013 - 8:44pm.

Why? So your 401k starts looking like a 201k...

Because I had no 401k or 201k or whatever, just a decent freelance gig and a non-trivial bank account. (And no interest in investing prior to the 2008 crash, but that changed in the ensuing months and years.)

Submitted by flu on February 8, 2013 - 8:47pm.

spdrun wrote:

Why? So your 401k starts looking like a 201k...

Because I had no 401k or 201k or whatever, just a decent freelance gig and a non-trivial bank account. (And no interest in investing prior to the 2008 crash, but that changed in the ensuing months and years.)

You're never gonna time things right..You're never gonna be able to pull out right before a run up and sit it out exactly when the market is going down or short the market on the way down exactly when it's going down.. You'll be wrong some of the time. You'll lose money some of the time. Hopefully you're right more often then your wrong, otherwise you're just better off sticking with index funds or a mixture of passive stuff.

Submitted by spdrun on February 8, 2013 - 8:51pm.

Yeah, but you'd have had to have been Stevie Wonder not to see the 2008 crash and foreclosuremageddon as some sort of business opportunity.

Submitted by CA renter on February 8, 2013 - 10:30pm.

paulflorez wrote:
There should be less restrictive HELOCs which base the high price off of average appreciation over several decades (more conservative estimate) but let you spend it on whatever you want and then HELOCs which take whatever the appraiser says but requires oversight so that you invest in something that will actually improve your financial situation (home improvement, pay off higher interest student loan debt, etc).

Or more generally, something that keeps people from at least directly using equity to buy junk that only depreciates in value.

It's obvious that the consequences of unbridled freedom of credit for the individual cannot be limited to the individual. When the economy tanks, it affects even those who do not abuse credit and make smart financial decisions. Reasonable limitations should be put in place and more oversight is definitely needed. While I'm somewhat happy my home value is going up, I'm actually more worried about another bubble developing in this more-demand-than-inventory environment. I'd rather have slower growth of my home value and economic stability over the long term.

I'm tired of this attitude that short term gains are worth destroying long term viability. It destroys households, businesses and seriously threatens our economy.

Could not agree more!

Submitted by CA renter on February 8, 2013 - 10:52pm.

earlyretirement wrote:
I said it before and I'll say it again. The VAST majority of the people out there vastly overestimate their investment skills/abilities/timing.

I'm not saying everyone. But I'm comfortable with saying the vast majority of people out there. Everyone thinks they will do wonderful and their leverage/arbitrage play will work out for them. Especially in a stock market like this where it keeps going up. Everyone thinks they are some genius or guru. (Kind of like in the dot com days.... and the real estate bubble years).

Yet they won't admit they probably $hit their pants during the financial crash and the Great Recession. Where no matter how many times they tried to catch a falling knife their hands got awfully bloody. Nope. They won't admit that.

I've seen it time and time again over the last twenty years.

The people that leverage will always argue how they will always do smart and wise and fantastic things with the money that make it a smart or wise investment. Yes, sometimes it is. But lots of time it doesn't turn out well for them.

And in many of those cases, you'll never hear from them. They will tell you about their best investments but never about their worst investments or leverage plays that didn't turn out well.

Human nature....

Absolutely true.

I had a friend who was a fairly big-time commodities trader on Wall Street. He made many millions over the years, and I figured he still had most of it, especially because of the way he talked and how he and his wife spent money. We often talked trading and he would make fun of my positions (not terribly small, considering they were never leveraged) while showing me his very large positions and puffing his chest out. Always thought that was all his money. I always deferred to everything he said because he was an old-timer on Wall Street and had held powerful positions there.

Long story short, we ended up in a situation where they owed us money (just a few thousand, but still...), and we are now entering our second year in our collection efforts. They are flat broke, and I mean really, really broke. Apparently, all of those large positions were leveraged to the hilt. Because of his Wall Street connections, he was able to leverage far more than most people ever could, and his positions turned against him. Because of his age, he will never, ever be able to recover from this.

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