Posted on June 3rd, 2008 in Mr Mortgage's Personal Opinions/Research
This has been out there for a week and a half and I missed it. This is a Goodie and a quick read. http://www.occ.treas.gov/ftp/release/2008-58.htm
Comptroller Dugan says…“I can’t stress enough how crucial reserves will be in helping the industry manage its way through this situation,” he said. “At some banks, the portion of reserves attributable to home equity loans just barely covers 2007 chargeoffs. With losses accelerating, those reserves are simply not going to be adequate, and that’s why our examiners are encouraging more robust portfolio analysis and loss reserve levels.”
Mr Mortgage – More on Home Equity Loans/Lines
Home Equity Loans are a killer. 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. The ‘Home Equity Line/Loan Implosion’ could turn into an entire ordeal in and of itself.
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, 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 have reduced housing affordability further, will extend the housing slump and perhaps cause some real damage to consumer spending.
Just recently 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’.
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