Investment bank Keefe, Bruyette & Woods in mid April released a report saying that unused home equity lines of credit totaled $1 trillion nationwide and that banks moving to cut off some of that credit amid a housing slump could backfire.
KBW said there’s an additional $1.2 trillion in outstanding debt on credit lines and home-equity loans. To put the numbers in perspective, the total of $2.2 trillion (used and unused HELOCs and home-equity loans) equates to 20 percent of outstanding first-mortgage debt and roughly 85 percent of outstanding non-mortgage consumer debt ($2.5 trillion), the report found.
“In our view, the importance of home equity lines as a source of household liquidity is a recent phenomenon and one which can have an outsized impact on the current economic cycle.
…
Throughout the country homeowners who may have borrowed $10,000 or $20,000 on a $100,000 or $200,000 home equity line of credit (HELOC) are receiving notice that their line of credit has been reduced to $15,000 or $25,000. In our view, this practice, which we believe is increasingly widespread, is likely to add, rather than subtract from credit issues at financial institutions overall. As consumers experience a reduction in a key source of their liquidity, the most financially vulnerable households are likely to experience increased stress, and without access to their largest source of credit could be forced to default. Other vulnerable households who have yet to hear from their lenders are likely to drawdown lines, increasing the credit risk on home equity portfolios. Finally, because of the size of this issue, in our view, reduced household liquidity is dampening consumer confidence … which, in our view, will deepen the recession and add to overall consumer credit costs outside of home equity portfolios.”
And the banks most exposed to HELOCs…
For the lenders with the largest HELOC portfolios, the firms with the most total home equity exposure (outstanding plus unused lines) relative to capital is Washington Mutual at 804%, followed by National City (478%), Wells Fargo (369%) and Bank of America (362%). For Washington Mutual, the capital calculation … was done prior to the announced addition of $7 billion in capital, and we believe this exposure was a major reason behind the need for additional capital. Overall, in our view deterioration in home equity portfolios, and the further risks to these portfolios from cutting lines, is a major reason we remain cautious on the banking sector.
(Editors’ note: Washington Mutual in early April announced a $7 billion capital injection from private equity firm TPG Inc and other investors.)
The report isn’t available online but you can visit KBW at www.kbw.com.
Personally, I’d like to learn more about HELOC exposure in Orange County for a potential article in the Orange County Register. If anyone lives here and has been notified by their lender that they can not draw further from their HELOC e-mail me by CLICKING HERE or call 714-796-6726. I’ll also take story suggestions. What’s the key angle on reducing HELOCs? Hey, maybe it’s a good thing because it will prevent consumers from owing more than their home is worth…
If anyone is seriously going to use a HELOC to pay their mortgage, they are in pretty deep trouble. I don’t think allowing people to take out more than their house is worth is going to do anything but postpone their agony a bit. The banks have already been burned by their own lending standards, they don’t want to do it again. Yes, the economy looked good for a long time because of the home ATM, but that time is over, it can’t be restored.
Right, KBW, what the banks should be doing is letting distressed borrowers draw down larger balances so they leave a bigger crater for them when they explode.
One problem is that homeowners were paying down their HELOC debt with the idea that they could re-draw aginst the line if they need it. Now you have people drawing down the lines even though they don’t need it, but might, sometime in the future. (like all mortgage brokers and RE agents, whose income is tied to the current dire cycle.)
I’ve said before, and I’ll say again, you can’t change the rules overnight and not expect consequences. The inability of people with decent credit, home equity and who are making their current payments on time, still cannot refi to fixed rates or to lower rates. Too many did not qualify for their current loans with full documentation…but they’re still making timely payments. Why throw them under the bus and not allow them to refi to make their situations better? - I’m not talking about those already upside down in their mortgages.
broker_X:
The people you are talking about are still overleveraged, the only difference is a matter of degree. If you couldn’t qualify for a FRM at the time you bought the property, you took a risk by using a higher-leverage product. You can’t magically refi aggressive loans into conservative ones without cost.
Of course there will be consequences: banks will lose less money. To date, there’s no law forcing banks to do dumb things in perpetuity, and banks are starting to take advantage of that fortuitous current situation to triage their losses. It’s not like someone won’t still give you a HELOC if you have have equity and means to pay it back, and credit history to suggest that it will be a good loan.
If you think you’ll need the line later and won’t qualify as a good credit risk by then (whether due to your situation or the lending environment), borrow it while you can.
Oh man, Buy Houses Now! is at it again. First, how are the holders of these lines all “distressed”? That’s bizarre. Second, you have NO PROOF that homeowners couldn’t qualify for fixed rate loans, none. Don’t you worry your pretty little head about anyone’s choice to take advantage of the huge savings that most ARMs provide. I swear, this busybody bullsh!t is really getting old.
Nina’s blog entry was pretty funny with her sense of entitlement. “What do you mean my equity is gone? The market can’t take away the equity in my house! Waahhhh!”
Thoughtful: the unable-to-refi scenario was broker_X’s–take it up with him.
So I have $65k on my HELOC and $20K in my savings. So should I pay down my HELOC, or just keep it maxed out?
If you can make a spread (or come close) investing it, keep it out. You always need something in hard cash. If you use the savings, and they clip the line you’re up a creek with neither.