Posted on May 2nd, 2008 in Mr Mortgage's Personal Opinions/Research

Fresh news out…S&P pulled a slick one. They STOPPED rating second mortgage RMBS citing “anamolous and unprecedented” borrower behavior. Here is a little piece from Bloomberg that enhances the previous story very well, calling all Home Equity loans ‘junk’.

Remember, this is a $1.3 TRILLION market with the bulk belonging to very few banks such as BofA, Wells, Chase, CITI, Countrywide, WAMU, National City, GMAC and IndyMac. I put a couple of nice quotes below. This could turn out to be a fairly large story in the making.

Home Equity Lines of Credit and loans (HELOC, HEL’s, second mortgages) were the true ‘Home ATM Machine’ and could be a big wipe-out for the big banks. These loans were mostly used to avoid Mortgage Insurance on purchase and refinance loans over 80% LTV and went up to 100% of the house value in recent years. As a matter of fact, an appraisal or full documentation was often not required. These loans were very easy to get and primarily relied upon an electronic evaluation of the property value and credit score alone.

They are almost always a total loss when in default. This is because in many cases, the first and second mortgage add up to more than the property is worth, so the second mortgage lender does not get anything in foreclosure – it all goes to the first.  As a matter of fact, most second mortgage holders do not even bother with foreclosure proceedings any longer, choosing more traditional means of collection.

A few months back banks began to freeze consumers out of accessing the available credit on the Home Equity Lines. Countrywide kicked if off by freezing 122,000 in one swoop and WAMU follow-up shortly thereafter with a 50,000 line freeze.

Since then, most large named banks have began to freeze lines originated prior to 2008 or with original combined loan-to-values over 80% in regions where property values are substantially dropping. This just so happens to be the regions where these loans were done the most.

This hurt thousands who were not prepared. Many use these lines for highly legitimate purposes such as running a business, college tuition, a rainy-day fund or that brand new Mercedes.  Now, it looks as though the days of extracting all the cash out of your home through Home Equity Lines are gone for good.  This is probably a good thing in the long run, but just as with Jumbo money virtually vanishing overnight, these loans vanishing overnight will reduce housing affordability further extend the housing slump and perhaps cause some real damage to consumer spending.

For those of you interested in seeing the Big Banks Exposure to Home Equity Loans, this is a link to the Fitch report. It is ugly. Many of these banks have not yet begun to take write-downs on these loans. FITCH – BIG BANKS HOME EQUITY WOES fitch-home-equity-woes20080314.pdf

Also, for those of you that wish to watch it in video version, I did a YouTube piece on it last month.  MR MORTGAGE – HOME EQUITY DELINQUENCIES SURGE


  1. dude, you are awesome.

  2. I watch all your videos and find then very helpful.

    Is this problem big enough to take down a big bank or two? If so, would the FDIC let them fall and run the risk of wide spread bank runs?

  3. read the link above – I pasted it here but don’t know if it will work. If not click above… FITCH – BIG BANKS HOME EQUITY WOES fitch-home-equity-woes20080314.pdf

  4. This hurt thousands who were not prepared. Many use these lines for highly legitimate purposes such as running a business, college tuition, a rainy-day fund or that brand new Mercedes.

    Buying that brand new Mercedes with home equity (or any cars in general) was part of what got us into this mess.

    Unless you’re pulling money out of the house to pay for a medical emergency, I don’t feel sorry for these folks.

    Before about 10 or 15 years ago most people never even thought about pulling out home equity – then it was marketed heavily by the mortgage industry so I don’t feel sorry for them either. Lets get back to hard work, savings, frugality, thrift and the old saying: “Never a borrower or lender be”.

  5. […] HOME EQUITY LOANS – A BIG BANK KILLER. S&P STOPS RATING 2ND MORTGAGE… Home Equity Lines of Credit and loans (HELOC, HEL’s, second mortgages) were the true ‘Home ATM Machine’ and could be a big wipe-out… […]

  6. I wonder how many people bought large dollar homes, got 100% refi, and are now going to walk away. Take a loss on credit score, a few years of not being able to get a mortgage. The biggest money maker that I have heard of in a long time. Lets say $500,000 of cash that you don’t have to pay back. Whats funny is the government wants to help you stay in an upside down house and 2nd mortgage instead of taking the windfall profit.

  7. Friday afternoon S&P cut Countrywide to junk status. The stock market didn’t care. I guess they must be forgetting that Countrywide also has Alt-A.

  8. I DO feel sorry for those who were counting on these loans. How can you be so dismissive ot that? My parents are blue-collar, and couldn’t have afforded to put my sister and I through college if they hadn’t done a cash-out ref on their home. And, that was over twenty years ago, well before this boom!!

    HELOC’s have certainly been over-used by the new middle class, but those hurt most by having the money that they were ALREADY APPROVED TO BORROW yanked out from under them are those who are going to have fewer places to access credit.

    What exactly do we tell those people and their children when college tuition bills are due in three months?? “Your plan to send your children to college has changed. Please, tell them to go work at the factory that closed down.”

  9. I am not dismissive of that. The Mercedez comment was not include everyone who took out helocs.

  10. I found your site on faves.com bookmarking site.. I like it ..gave it a fave for you..ill be checking back later

  11. thanks hedgie. I have liked your videos.

  12. Excuse the ignorant question, but just HOW do they get away with deciding to STOP rating 2nd Mtg RMBS…??!!! Don’t like the way the game is going, okie dokie, just CHANGE THE RULES…WTF??

    Who is really in charge anymore? Seriously??

  13. admin – He was joking about the Mercedes brother (or sister). It was tongue-in-cheek. In-line with John’s point – You yank the HELOC from the people using it to pay for education for their kids, or themselves for that matter, and what are they going to do now, go to SALLIE MAE? Get real, they are in the midst of total meltdown. The largest lack of funds crisis in their history. They don’t have any money to lend because they’re worthless to invest in. The silver bullet that killed them, in large part, was the brain candy genius (another togue-in-cheeker admin) of the “College Cost Reduction and Access Act of 2007”. Talk about the dumbing down of America.

    This market crisis has oozed its way into every nook and cranny now and it’s only going to get worse. Other countries want to see us fall on our faces. They will do what it takes to make that happen in our time of weakness too. Mark my words.

    Don’t be the person in crisis who hoards food and water, never helping a single poor sole because “they were too stupid to do the same as you” kind of person. If you do so, then don’t be shocked when nobody is willing to help you in your time of need. Although it could be Confusious (Philosophy emphasizing personal and governmental morality, correctness of social relationships, justice and sincerity), it’s merely Common Sense.

    Open up your mind. You’re going to need it soon.

  14. Wow Spidey–

    That is some spooky and kooky prediction- but I have had that sort of “calm before the storm hits” feeling for months….like this is somehow a huuuuge year of change for our country, and NOT in a good way.

    Not sure how to prepare, since our currency may soon be worthless, and you sure as hell can’t eat gold or silver, unless of course you are a SPIDER MONKEY….I have heard those little bastards will eat about anything!!

    Happy Freakin’ Monday everyone…..

  15. Mr. Mortgage!!

    There is a lot of talk now about how BofA NEVER intended to purchase CFC, they were only trying to get their initial investment out, and have essentially bamboozled everyone into thinking they would aquire CFC!!!

    I think it is totally plausible. What do you think??

  16. I have been prediction that for months.


  17. Citi has a huge exposure in this area due to the risky nature of the loans they funded. They funded thousands of 2nd mortgages with 100% financing with no income documentation and more importantly behind NEGATIVE AMORTIZATION 1st mortgages. They were the only ones that would lend behing the NEG-AMs and now they are paying dearly. No doubt, some of their 2nd mortgages are at or above 150% LTV and rising daily. They have closed out thousands of HELOCs to help their liquidity and risk exposure, but the LTVs will continue to rise due to declining home values and NEG-AM 1st mortgages. This has got to be a huge blip on the ForeclosureRadar. Could they be the next bank to join Bear Stearns?

  18. you nailed it Skarkee – read that pdf file I attached to the blog post. The banks are screwed with helocs.


  20. Fantastique informations! Enfin je comprends le bullshit yankee de la finance. Translation: Now I understand the famous saying by Barnum;”There is a sucker born every minute.” Boy oh boy! What a crazy financial system. I was thinking gambling a little bit by making bear spreads 2009 on Merril Lynch, Lehman Brother and Morgan Stanley. I know it’s a gamble. But with the fantastic information, I can at least justify my decision. Boy! We are living in real crazy times. Merci beaucoup.

  21. […] Read the complete story here: HOME EQUITY LOANS – A BIG BANK KILLER. S&P STOPS RATING 2ND MORTGAGE RMBS! […]

  22. Hi there,

  23. […] Home Equity Loans – A Big Bank Killer […]

  24. […] Home Equity Loans – A Big Bank Killer […]

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  28. […] RMBS, which are widely thought to be ‘unratable’. As a matter of fact, on May 2nd S&P announced they have STOPPED rating them  all together due to citing “anomalous and unprecedented borrower […]


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