The FDIC said the Federal Reserve has defined a significant decline to mean situations where the unencumbered equity in a property is reduced by 50 percent or more.
Since when is the Fed involved in defining any sort of threshold level in terms of equity decline? Is this in any way even remotely the Fed's mandate?
theyieldcurve wrote "is this in any way even remotely the Fed's mandate?"
Your question has been noted. The black helicopters will arrive shortly to transport you to your camp. Make sure your family has plenty of Ameros to pay for your food.
"the report's authors, argue such reductions could backfire on lenders, leading to more loan delinquencies if borrowers needed their credit lines to stay financially afloat."
The FDIC said the Federal Reserve has defined a significant decline to mean situations where the unencumbered equity in a property is reduced by 50 percent or more, the FDIC said.
this is a huge statement IMO.
I would guess substantial #'s of people in those areas HAVE lost 50% of their equity. Many didn't have equity at all and are now negative equity.
is this the case of the federal regulators not understanding how much equity is evaporating?
Looks like a tough choice-- showing tough love to force the debt addicts to keep paying off their arrears, or giving them more junk to keep the high going.
I really don't understand the FDICs recent push. it seems sure to push more banks into failure. (lending to homes in rapidly depreciating markets)
The only way I interpret it is this: they want these HELOCs to be kept open so that people can continue to use them for living expenses, delaying the eventual downturn.
it fits with the govt mantra: "the most important thing is to consume"
so is the FDIC part of this party line? keep the patriots consuming to keep the system going long enough until something (what?) can "fix" this?
or are they just trying to defer the pain until 2009?
or is this a coordinated effort. use the Fed to bail out the banks, HOWEVER the price of this is that the banks have to loan out to deadbeats? we've often discussed "pushing on a string", but perhaps this is a workaround for the pushing on a string problem. mandate that the companies lend?
I really don't understand the FDICs recent push. it seems sure to push more banks into failure. (lending to homes in rapidly depreciating markets)
The only way I interpret it is this: they want these HELOCs to be kept open so that people can continue to use them for living expenses, delaying the eventual downturn.
it fits with the govt mantra: "the most important thing is to consume"
so is the FDIC part of this party line? keep the patriots consuming to keep the system going long enough until something (what?) can "fix" this?
or are they just trying to defer the pain until 2009?
or is this a coordinated effort. use the Fed to bail out the banks, HOWEVER the price of this is that the banks have to loan out to deadbeats? we've often discussed "pushing on a string", but perhaps this is a workaround for the pushing on a string problem. mandate that the companies lend?
Nemo, cutting HELOCs on credit worthy borrowers with plenty of equity is classic credit crunch stuff - and definitely bad for the economy. That is why the FDIC wants the banks to do it on a case-by-case basis.
Of course the banks are using their computer models for valuations, and that isn't the best method.
It seems like the banks can't/won't do anything on a case-by-case basis. They don't have the manpower. That's a good part of the reason why we're in this mess.
Beep boop boop ...
computer ready....
mark to model process working....
input asset purchase value
input asset valuation model
input fudge factor
ignore valuation model if asset
"If homeowners were using their HELOCs to pay their first and second mortgages"
IF!?! Those with tons of equity aren't availing themselves to such sillines. They have savings as well as equity. Those with equity are not in need of HELOC. IMO.
I'm not sure Ms. Bair understands her agency's function.
Is she even responsible for enforcing the Truth in Lending Act? As far as I know the FDIC exists to insure the money of bank depositors not guarantee the credit lines of its debtors.
A bank's capacity to lend is finite. To demand that it go beyond those limits is to jeapordize the funds of depositors and that cannot be the call or function of the FDIC... can it?
Given that banks do not any documentation of the financial situation for many of the loans that they have given out, how in the world are they going to know when such a chance occurs ?
Calculated Risk writes:
"...the FDIC wants the banks to do it on a case-by-case basis."
It's going to be case by case all right; one month's Case-Shiller charts to the next, showing home prices declining 2%plus/month, suggest it'll only be a matter of months until the FDIC can go state by state, starting with CA, NV, AZ and FL.
"I really don't understand the FDICs recent push. it seems sure to push more banks into failure. (lending to homes in rapidly depreciating markets)
The only way I interpret it is this: they want these HELOCs to be kept open so that people can continue to use them for living expenses, delaying the eventual downturn."
Exactly. That's the point. You believe Sheila Bair is an apolitical technocrat? The FDIC is different than any other W/Cheney admin agency?
Family member and I have WAMU HELOC lines, we both got reduction notices today. Interesting, WAMU reduced their line to what they owe and mine to what I owe. In both cases, based on home purchase in 2001 and comps in area there is no justification for the decrease. In fact, my HELOC is in first position.
The law is the law. Both parties agreed to the law when they signed the contracts. The Banks then decided they were going to make their own law and a stick has appeared telling them to reconsider.
While still unlikely, these actions combined with other illegal and quasi-legal actions are a step closer to either the government or the courts telling banks that whole segments of loans are no longer enforceable and forcing a re-negotiation of the loans or a forfeiture of the loan.
Certainly there are individual cases where responsible people have had their HELOC taken away, OTOH, you can go over to the Irvine Housing Blog and look at an unending number of people who HELOCd a lifetime of equity away or did who knows what with the money.
so, a white guy is the best rapper, the germans donw want to go into a war and regulators are encouriging the banks to extend credit to borrowers so they dont default.
one question tough for the regulators, how to assure that the borrower doesnot decide to spend his heloc to pay a leasing payment for a lexus instead of the mortgage?
It seems like the banks can't/won't do anything on a case-by-case basis. They don't have the manpower. That's a good part of the reason why we're in this mess.
-Koolaid
I have noticed quite a few employment ads lately for banks wanting experienced mortgage originators. Not sure they got rid of the old ones and need new ones or they need more people to do refi workouts. I'm guessing the latter. Whenever a housing bill eventually passes I bet they will be swamped.
I don't understand the complaints about FDIC here. Bair is well within her appropriate agency function to make sure the institutions she supervises stay on the right side of TILA.
Here's the short version: Truth In Lending Act (TILA) is a federal law. It applies to all lenders, regardless of who supervises them. The TILA statute itself happens to give the Federal Reserve the explicit authority to implement the law by writing the regulations. Reg Z is the set of regs that implement TILA. All the agencies that supervise depositories (FDIC, OTS, OCC, NCUA) have to make sure their supervisees follow Reg Z.
(Not all federal lending law is implemented by the Fed, although a lot of it is. For instance, RESPA explicitly gives regulatory authority to HUD, not the Fed. So all RESPA-related regulations are promulgated by HUD. That's just the way these things are done.)
However, a lot of regulatory guidance comes out as "interagency policy," meaning that all the supervisory agencies get together and jointly produce policies that cover all regulated depositories. The HELOC guidance from 2003 is an interagency document, like the Nontraditional Mortgage guidance from 2005.
The thing about the Fed's definition of "significant decline" is that that's the kind of thing any of the regulators do: they take a fairly vague term in the regs like "significant decline" and come up with a rule of thumb for what constitutes "significant." Otherwise, you'd have one go-go bank defining "significant" as 100% and one constipated bank defining it as 1%. Sure, it ends up being somewhat arbitrary, but that's the alternative to chaos.
The whole idea of basing the definition of "significant decline" on unencumbered equity, not total property value, is exactly designed to hit high-LTV loans first and let low-LTV loans go as as long as possible.
Imagine you have two properties originally valued at $100. One has $80 in total drawn-down liens; the other has $60. The property value falls by 10% to $90.
The first borrower experienced a 50% drop in equity (from $20 to $10). The second borrower experienced a 25% drop in equity (from $40 to $30). The first borrower gets his remaining LOC frozen; the second doesn't.
That's as close to "case by case" as you're going to get in a regulatory policy document.
Is there not an appeals process if the bank cuts off the HELOC to get it re-instated. I would think a lot of small businesses use HELOCs. The problem with HELOCs is they can be borrowed against without any specified purpose, I wonder if the banks could add in conditions of usage?
Regarding the FDIC mandate, perhaps they have done some modeling which shows what happens to deposits if HELOC's are withdrawn, thereby exacerbating liquidity concerns? Don't know this, just speculating.
And with regards to help wanted ads at banks, they are and will continue to beef staffs for workouts, particularly those that will move assets to the GSE's.
The problem with HELOCs is they can be borrowed against without any specified purpose
No, that's the definition of a HELOC. They are called HOME EQUITY lines of credit because that's the issue and the only issue.
People who want small-business funding can get commercial lines of credit that are not secured by their homes. Unless, of course, their business doesn't show enough value for that.
There is no way on this earth anyone is going to "reinstate" a frozen line of credit because it is being used to prop up a stuttering small business. The HELOC isn't secured by the business, it's secured by the house. If the business has decent prospects, then these folks should apply for a business loan. If the HELOC is just making the house payment because the business doesn't cash-flow enough to support its owner, then it's time to freeze the thing.
I've made a small fortune, and you've squandered it all.
You've shamed me till I feel about one inch tall.
But I thought I loved you, and I hoped you would change,
so I gritted my teeth and didn't complain.
Now you've come to me with a simple goodbye.
You tell me you're leaving, but you won't tell me why.
We're here at the station and you're getting on.
And all I can think of is.........
I don't think the banks would have much problem making their case. It is nice of the FDIC to have high-class worries, but they need to be careful - if the default rate on HELOCS surges, the FDIC will look like it set banks up for failure, much like Greenspan pushing ARMs when interest rates were at a historic low.
I don't think there is anything wrong with the logic here at all. whacking HELOCs without regard to the underlying value IS bad for the economy. And if my value holds, if i want to use the money for whatever (at 4% now I might add) instead of using other credit means because it is cheaper, then that's good for the general economy. And for me.
This knee-jerk blah blah blah on this thread misses the point. The point is this is a sign of a credit crunch. how you feel about HELOCs personally governs your own behavior but no one else's. In the macro-context this points to the fact that banks are scared of their own shadow on the one hand, and possibly unable to lend on the other.
Read that last sentence again and let the impact of this roll around in your heads a bit. WaMu is, perhaps, doing this because they don't have the capacity to lend, and they don't have the capacity to bear any losses even from good outstanding HELOCs. That, everyone, is the issue here. Not regulation and not your personal credit philosophies.
"whacking HELOCs without regard to the underlying value"
Are the banks really doing this? You certainly can't blame banks for reducing lines for those with high LTVs in depreciating locations. It also makes sense to project and consider further declines.
i'd agree allenc. i have a HELOC that is untapped but even now is more than fully supported by the value, and likely value. i would view it as suspicious if it got cut, because there is no reason to do it.
on the other hand, i had a credit card with a 25k limit on it, also pretty much untapped, that had it's line reduced down 10k. i thought that was suspicious too (BOA i'm talking to you) because, ya know, i am the sort of guy that any lender would probably want. and if they did that to me, what are they doing to others? in a macro sense here too, this is really, really bad. what BOA just said to me is we're screwed...because, you know, if people don't borrow, how are they going to keep the numbers up?
All of this points to a severe credit crunch, and this is way bad with the economic numbers being what they are. but from a personal perspective it might force people to change behaviors. the big question is will people ever view credit the same way again? if they don't, the banks are signing the next couple of decades away on the profit front.
Blaahhh, the banks are almost all insolvent right now (and probably have been since last August and before).
So all this would do would be to make them more insolvent.
In practice, my small business clients find it totally impossible to
get financing. A few can get money from the SBA. Small business people get financing from savings, relatives, loan sharks,
mortgaging the house, credit cards, and I knew one who financed (years ago when this was possible) by check kiting. Getting a small business loan from an institutional lender--a waste of time. I would never advise a client to even try.
By the time it is possible to get a bank loan, you are a medium to largish business.
Canadian watching with popcorn writes:
"the report's authors, argue such reductions could backfire on lenders, leading to more loan delinquencies if borrowers needed their credit lines to stay financially afloat."
W.T.F.?
Right there with you. The banks have realized they're paying the interest via the new loans. How dare they stop that.
Vadar:
Yes, the banks are making new 'laws.'
But if they do not, they go under. This is another variation of the prisoner dilemma. But in this case, since its the death penalty on the line, they had no choice but to talk (cut loans).
I like Max Dama's analogy. This is the reverse of a bank run. We've been talking about the bankers getting pucker butt for years! Now this is what it looks like when it happens.
I'll second lawyer liz's comments on small biz loans.
To get one you need show that you are making the kind of money that would make it unnecessary to borrow more.
I know of one recent example of a company having cashflow issues. They manufacture parts for mass transit vehicles. They asked the bank for a line of credit. the bank said , "sure, all you need to do is put up liquid assets in the same amount as collateral". They'll loan you the cash if you give them that much cash as collateral. Not very helpful.
Well, the top 1% better pick up the slack or there are going to be some ugly consumer spending numbers in the next year.
Small business people get financing from savings, relatives, loan sharks,
mortgaging the house, credit cards, and I knew one who financed (years ago when this was possible) by check kiting.
Are you sure that's an effect, and not a cause, of institutional lenders' unwillingness to make certain kinds of small business loans?
I agree that it's much harder to get a small business loan than it is to get a HELOC. The price you pay is that when you run out of HE you run out of LOC. Then you get these people who think they have "established" a business (which has run for a couple of years on HELOC and check-kiting), and who are just shocked that the commercial loan department doesn't want to make a loan to them because they're already overleveraged.
Mortgage lending is crazy enough. I'd shoot myself if I had to deal with small business lending.
OT from previous thread regarding everbank and foreign currency diversification:
re: everbank
They are NOT Ok - one negative is their 1% commission in AND out of the dollar that ends up being charged during the foreign currency transaction ( - they say their rates are within 1% of the wholesale rate but it ends up AT 1% AGAINST you).
Compare this to the bid/ask spread of a currency ETF like FXE, FXA, FXF, FXY; the annual fee for these ETFs is around .45% - not too shabby.
As regards their CD interest rates, be very careful ! I'm stuck in a (small) Icelandic Krona position with them with a very low CD rate - this when the Icelandic CEntral bank has overnight interest rates at 16.5%; 7 day CD rates at 15.25%
The rate offered by Everbank 2.5% ? Bleeding robbery I call it. Yet they say they guarantee competitive rates.. I'm working through my issue by moving that holding to Kaupthing Bank - but that's another negative with Everbank - I can't transfer the krona directly - it has to be converted BACK to the US$ and then back again to krona ( so more vigorish( bid/ask spread) at either end ).
I'd be very wary of them.
For currency diversification I'd look at all the ETFs I mentioned earlier - there are many others - For Chinese there is CYB.
An interesting, very recent ( two weeks old ) ETN( yes etN - do your own diligence on the differences ) is PGD ( i.e pegged).
This is equally weighted on the Saudi Arabian, UAE, HK, Singapore and Chinese currencies - all currencies that are tightly pegged or held in a narrow band to the US dollar.
The thesis is that it their pegs will break or the float band widened as the try to battle the inflation caused by the peg to the US dollar.
I know of one recent example of a company having cashflow issues. They manufacture parts for mass transit vehicles. They asked the bank for a line of credit. the bank said , "sure, all you need to do is put up liquid assets in the same amount as collateral". They'll loan you the cash if you give them that much cash as collateral. Not very helpful.
What these folks fail to understand is that the HELOC lenders presented them with the same deal: put up collateral (home equity) in at least the amount of the loan and you're approved. But for some reason they found this deal "very helpful."
If yo're running a small business on HELOC, you're toast.
Ummm Misean. two friends of mine and I started and ran a business off HELOC money for over a year before cashflow made it possible to pay them off. Then we sold it off for some pretty decent dough. What experience do you have?
Why, oh why do people conflate all these issues and try to tell others how to use leverage when they have no idea or personal chops to go on? What, do you think you just walk into a bank with a good idea and they give you money? No, you start it by maxing your credit cards and your house. Welcome to being an entrepreur. You put up your own cash and assets because you have skin in the game and you believe. Banks only lend to people once they have a track record.
misean, i'm just saying that sweeping generalizations aren't helpful. there are lots of good reasons to use a HELOC and a lot of bad ones. I view starting a business as a good one both on the personal and macro level. especially the macro level.
on the one hand people here scream about loans being bad because there was no skin in the game. ok. so now you say that it's stupid to use a HELOC to fund a new business venture? What better skin in the game than the equity in your house? in fact, i guarantee you that no one, no investors, venture cap or anyone else will even talk to you if you didn't go this route. why? skin and belief in what you're doing.
In fact, I'd say this was the best way to use your HELOC if you have a solid idea. only followed by value-enhancing home improvement, education, or other economic benefit.
In this environment, the wise banker cuts back on unsecured lending.
I know allenc but jeez...it just struck me that they used flawed models on the way up and learned nothing on the way down here. there is no way anyone would touch my credit line if they used good ones. frankly i don't care because who needs 25k in open credit on a card. but it just strikes me as being really dumb about how to apply the formula. i'm actually someone that can pay it back.
Perhaps any HELOC agreement should begin with a warning that the bank can withdraw or cut back the HELOC at the bank's discretion leaving you, the homeowner,without funds the HELOC was expected to provide.
I hope you're feeling better. It's good to have you back.
Thanks. I'm feeling rather better today.
If you have the time could you do a piece about the Community Reinvestment Act, redlining and racism in lending?
I'm not feeling that much better.
All you're going to get is the Shorter Tanta on CRA: the underlying concept of the law--that if you take deposits in an area you must "reinvest" them in loans--not just mortgage loans--in the same area, is to me so self-evidently sensible, fair, and economically necessary that I don't get the ruckus over it. Of course there are plenty of demagogues out there who like to describe CRA as the thing that started all the high-risk lending. CRA isn't even a specifically home mortgage lending law; it applies to any bank lending, small business, credit cards, car loans, construction, you name it.
There are a lot of people, in my view, who would not have gotten toxic overpriced risky subprime mortgage loans if the depositories hadn't abandoned their neighborhoods. It isn't just that they'd probably have gotten a better mortgage loan from a depository; it's that if they had had access to responsible "starter credit" like a secured card, a used-car loan, a small personal loan, and had been able to build up a strong credit history with a bank they also had deposit accounts with, they'd have qualified for better financing and have quite possibly learned something about managing payments.
If CRA has anything to do with the subprime debacle, it's that banks pulled their deposit-taking branches out of low-income neighborhoods to keep from having to make loans there. That left no one but subprime brokers, payday lenders, and other loan sharks to cover those markets, and a lot of people were left vulnerable to fraud and exploitation.
I was on a bank CRA Committee for years, and I never believed that CRA made me make bad loans. It made me think long and hard about what "reinvestment" means. Surely there were many lenders who didn't think long and hard about it, they just decided it wasn't "worth it" to keep a branch with "nickel-and-dime" deposits in an urban or rural neighborhood and put loan officers there to make "nickel-and-dime" loans. So they left it to the usurers. In any just world that would have cost them their bank charters.
So your HEL was used as "skin" in your business venture...
Now your "skin" got Zillowed out and your lender finds out that he's the one who's been skinned. All you lost was something that you never really had in the first place; illusory equity.
Can you blame him for not wanting to dig the hole deeper.
What these folks fail to understand is that the HELOC lenders presented them with the same deal: put up collateral (home equity) in at least the amount of the loan and you're approved. But for some reason they found this deal "very helpful."
I fully understand that you are putting up collateral for a HELOC. I don't consider a home to be a liquid asset, though. In this instance they said if you can show us you have $600,000 that we can keep as collateral, we'll loan you $600,000. I don't see the point in that.
I've started two businesses. One on savings and credit cards. That one failed. The next one I used my home equity. That one worked out pretty well.
I've been trying to get the fed to take my unsold inventory from the business that failed and give me cash in return, so far they aren't willing to do that.
Very good to read your loud and clear again tanta! -- (and sorry to hear misean)
I have a question on this -- if the banks can't get their computer models to behave, what will the fdic do about it? What's the usual justice meted for TILA violators?
May I remind our readers that access to credit is a right that is inalienable. When we told the brits to stick it we also said:
"We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and Access to Credit."
Perhaps any HELOC agreement should begin with a warning that the bank can withdraw or cut back the HELOC at the bank's discretion leaving you, the homeowner,without funds the HELOC was expected to provide.
I'm curious why you think they don't say that. I doubt it's the very first thing they say, but I don't doubt that they say it somewhere. Just like how your credit card agreement says your limit can be lowered and under what circs.
I will say there are a lot of small businesses started off credit cards and HELOCs that are sucessful. Personally I give start-up and bridge loans to small businesses because the bank will not talk to them. A recent line of credit I issued was to a small food processer who needed money to buy commodities for inputs. It takes them about 6 months from purchasing materials to getting paid from the retailer. A long as the process makes a profit equal to the principle plus interest after expenses, the company is good for it. They went to talk to the bank and they said it was too small. Funny that banks are useless in this situation because this is where the majority of the US business growth stems from.
This discussion indicates to me that everyone needs to re-think their strategies, particularly in this new environment.
Sure, everyone has a story about some "brilliant" entrepreneur who started a business with HELOC money or credit cards.
Cisco, for example, was started by maxing out a number of cards. They were called "geniuses" because it worked. If their scheme hadn't worked, they could have been prosecuted for credit card fraud.
A lot of the psychology behind these sorts of strategies also involves expectations. Too many want too much, too soon.
Having worked both sides of the financing business, I can tell you that I would never use a bank or venture capital firm. The banks will strangle an idea at the first hint of trouble, and the venture capitalists want your first-born child as part of their reward for patience.
Patience is what financing a new business is really all about. So, people borrow or bring in venture people because they don't have the patience necessary to let the thing grow naturally.
Now, if time is absolutely of the essence and you can't do it any other way, I suggest finding private money. I mean individual investors who have seeded new businesses before, have their heads screwed on, and know what to expect.
Yes, they'll expect you to have "skin" in the game, but it needn't be cash. It could, for example, be a patent or copyright, what have you. So-called sophisticated investor have no interest in making you feel pain; they simply want to see commitment.
Finally, I much prefer the Alfred Krugg mindset, but that's a story for another time.
Yea you are correct, they are at death's door if they do not cut lines of credit, fast and in bulk. OTOH they expect the average joe to obey the law even if it destroys joe.
Thanks for an example highlighting liquidity vs. solvency - to ipodius' point if I parse him correctly - the withdrawal of credit willy nilly can exacerbate the damage to the economy by taking down otherwise sound enterprise's in a liquidity squeeze...
OTOH they expect the average joe to obey the law even if it destroys joe.
the average joe probably wouldn't have any issue with obeying the law if certain lenders hadn't given him the rope to hang himself (and, it would seem, to hang the lenders as well).
Before its all over with, this may become an all hands lynching.
Yea, all those financial institutions found it more profitable to play games with derivatives, CDOs and other exotic financial instruments while packaging and selling crap loans for the fee; instead of minding the nickels and dimes of 'real' banking. Real banking is not high profit. But all the exotic stuff really pumped up the old bonuses.
Tanta, I don't doubt that both say it somewhere in the several pages of legalese. I just thought that it should be first in big bold capital letters. (and make the borrower initial it and/or sing it out loud.)
'don't have a HELOC but have credit cards. Can't say that I ever remember seeing this statement, but, like i said, I'm sure it's there somewhere.
I have a question on this -- if the banks can't get their computer models to behave, what will the fdic do about it? What's the usual justice meted for TILA violators?
I'm not sure I understand the question.
TILA is basically a disclosure law: it mandates what you have to tell borrowers up front, and what the closing docs have to say, before you can obligate someone on a loan.
So TILA says that if you make an "open-ended" loan (ie, a line of credit involving future advances), you have to disclose the circumstances under which the lender may refuse to provide those future advances. The whole idea of TILA is that you can't just change the terms of the loan after the closing willy-nilly. So if the note the borrower signed says that the line limit can be decreased or frozen if there is a "significant decline" in the value of the house, then it is not a violation of TILA to do that.
Nobody is going to get busted for a TILA violation if it turns out they froze a HELOC when the decline in borrower equity was 49% instead of 50%. Nor is anyone going to get a TILA bust because the Case-Shiller AVM showed a 10% value drop but the Freddie Mac HVE model showed 9%.
TILA itself doesn't say anything about how lenders manage their models or calibrate them or set confidence scores or anything else. That is covered in other regs, such as the HELOC guidance (and the Nontraditional Mortgage guidance, as well as other basic safety and soundness regs covering home mortgage lending). TILA just says the lender has to have a factual basis for changing the loan terms: it can be a traditional appraisal, an AVM, a broker price opinion, or a tax assessor change. You really only get in trouble from a regulatory perspective if you mix and match what kind of valuations you use on any given day.
We all need to bear in mind that most HELOCs used an AVM to set the original credit limit. It's not like we're changing the "factual basis" in the middle of the game.
If I understand what FDIC is saying here, they're just pointing out that a lender cannot do an "across the board" freeze or reduction of its HELOC accounts in the aggregate, on a portfolio basis. You've got to run the AVM on each house, and calculate the equity decline for each loan.
My guess is that the way it usually works, the geeks go run bunch of reports to identify high original LTV loans in MSAs or zip codes or whatever that are experiencing declines. Then they run individual AVMs on only those loans. So the methodology is a combination of MSA-based (to find the population of possibly troubled loans) and "case by case" based. FDIC is reminding everyone that you can't just panic and skip the second step, because then you would run afoul of TILA, which doesn't let you change loan terms without specific factual grounds.
I just thought that it should be first in big bold capital letters. (and make the borrower initial it and/or sing it out loud.)
Well, the problem is that there are too many things we are now required by law and regulation to put first in big bold font. Unfortunately, you cannot put all the loan terms and conditions first, unless you change the note format to a Moebius strip.
Fer instance: every ARM note used in every ARM closing in the last couple of decades has not just bold but ALL CAP BOLD paragraph on top of page one saying YOUR INTEREST RATE AND PAYMENT MAY CHANGE.
And what do we get? A bunch of folks who signed that and thought they were getting a fixed-rate loan.
I used to do a lot of mortgage biz in Iowa. For many years IA notes had to have this "No Oral Agreements" verbiage on them, the point of which was to remind borrowers that only the terms of the doc they were signing were part of the loan, and that oral agreements not reflected in those docs were unenforceable. (Such a warning might have helped some of these "they promised I could always refi" people.)
State law didn't say where you had to put that, just that it had to be "conspicuous." We always put it at the very end of the note, in big bold caps, right above the signature lines. The theory being--and I'm sure we were right--that not everyone will read page one of a four-page note, but they have to clap eyes on the last page in order to sign it.
Of course you'd run into the same problem that everyone wants every important warning to go right above the signature lines.
The bad news is that everyone needs to read the whole thing all the time.
Tanta,
Now I see your point. But I think on my credit card agreement this explanation is located near the end after the disclaimer on famines and before the paragraph on astroprojection.
so ipodius, I'm not sure i understand your argument.
I totally agree that decreasing HELOCs will decrease access to credit for the average homeowner. decreased MEW will cause decreased spending/consumption.
however, wouldn't you agree that over-HELOCing has been part of the PROBLEM? I fail to see how opening the credit spigots again is a good thing.
But I think on my credit card agreement this explanation is located near the end after the disclaimer on famines and before the paragraph on astroprojection.
Which problem, by the way, is only going to keep getting worse. All that stuff is an accretion following various and sundry crises and catastrophes in years past, during the fallout of which everyone started to claim that "no one told me" that this could happen. So every year, on average, CC lenders added yet another covenant to their credit agreements.
Mortgage docs have, by and large, been a lot more stable than that, but that's because we keep adding extra "disclosure forms" to a heap of papers, instead of adding more and more covenants to the security instrument or note. Hence the problem of people "not having time" to read a big stack of papers at closing. Even though most of that stack has to be provided within three business days of application, you still need to read what you are presented with at closing to make sure it matches what you got up front.
At some point people have to start taking the position that financing a home isn't something you do every other week, it's a big debt and has profound impact on your financial future, and you just have to demand time from you lender to read the docs and you have to refuse to sign if you don't understand. I always get people saying you need a lawyer to follow most of this stuff and not everyone can afford a lawyer. I am inclined to think that there are plenty of people right now who would be grateful to have gotten out with only a couple hundred bucks to a lawyer who encouraged them not to sign that note.
Hi guys, just thinking out loud here. Regarding business start-ups and helocs and credit cards.
In the run-up to the bubble and during it seems to me that any business plan using such money was a no-brainer. Any trouble, re-fi or sell.
Now that the bubble rubble is facing us wouldnt that be one of the riskiest almost braindead moves to make? Sure there will always be a good idea with the right person to implement it but honestly how many businesses that relied on helocs were like that and how many were make your own candles, or doggy bakeries or crappola foufou boutique things?
Now when trouble comes there is no escape.
Needs.
Shelter, food, water, health
Anything that can snatch any or all of these away are to be avoided right now, right? Why voluntarily put these out on the block? Ulcer city
like i said, rambling.
the posters here seem like competent individuals who generally make decent choices and are able to make/do things. Re-read some of these sob fests that are newspaper articles and thnk about these people. they do not seem the competent savvy type, they seem more like they need a survival list made for them and someon assigned as their designated payee.
Does anyone know where, traditionally, WAMU has gotten the money it uses to fund HELOC withdrawals? Has this been drying up recently? Any chance they're using "prudent risk reduction" as a cover for "we're out of cash"?
Lemme reword - if a bank continues to do "shotgun style" heloc freezes, and in doing so freezes some clients in violation of TILA - what are the possible consequences to the bank?
I used the search feature, but haven't found anything yet. Have you done any postings analyzing the impacts of historical credit crunches? We talk a lot about this particular credit crunch, but I'm interested in understanding more about previous contractions (e.g. duration, severity)
Thanks in advance for pointing me in the right direction.
Alo said: "... what are the possible consequences to the bank?"
Someone else is more qualified to answer the question of the potential penalty to the bank, but I can tell you of my experience as an individual loan officer.
If we made and error, outside a tolerance level, on a TIL Disclosure, we would incur a compliance fine of $250. There were many other ways to incur compliance fines as well.
Habitual offenders were promptly made available to our competitors.
$250 may not sound like much in the overall scheme of things, but it was a lot of dinosaur eggs back in the day!
Lemme reword - if a bank continues to do "shotgun style" heloc freezes, and in doing so freezes some clients in violation of TILA - what are the possible consequences to the bank?
They'd probably just get a snotty audit report from the regulators and be directed to "unfreeze" any account that wasn't handled properly, unless of course the bank went back and got an individual AVM on one that was handled "shotgun" and discovered that the freeze was perfectly called-for.
I doubt there would be much other penalty; this is a regulatory error that is pretty easy to "put right" simply by unfreezing the account. It would be hard to show that you were truly "damaged" during the time the account was frozen, unless you showed that, um, you were unable to make your mortgage payment during the freeze or something, and if you showed that they could probably freeze your line again on the "material change in borrower's financial conditions" grounds.
That said, someone will undoubtely sue--hoping for class certification, too--on the grounds that even a temporary freeze of a HELOC caused them unbearable anguish about their future financial prospects.
Speaking of using HELOCs to pay mortgages, does anyone remember Ted Haggard, the evangelical preacher from Colorado Springs (natch) who was ousted after it turned out that he was seeing a Denver masseur for drugs and happy endings?
Turns out Ted is now an agent for something called United First Financial, a Utah-based multi-level marketing scam that sells a $3,500 software package purporting to "optimize" the use of a HELOC to make principal payments on a mortgage.
Look in the upper-right hand corner of this website and you'll see Ted's name and Scottsdale, AZ phone number. He's since returned to Colorado Springs, but a "whois" search shows that the same person controls that site on Ted's main website, which has only a mournful picture of Ted in a field, meditating over the loss of his tent-revival empire.
When Ted was defrocked, I figured he'd wind up selling cars. But no, he's selling software in the Amway style, trying to squeeze the last drops out of the dying mortgage market. Poor Ted. Your timing isn't very good on this one. And the car market stinks. Have you thought of a new career in taxi transportation?
Tanta, as usual your answers make me laugh and learn at the same time- thanks! Hope you are healing nicely and with a little somethin somethin to ease the pain.
If you continue to need credit to stay afloat, doesn't that make you insolvent?
Weather Helm, I think you've put your finger on a critical problem with our economy as a whole, not just housing. There is a big difference between missing opportunities because you can't get a loan and going bankrupt. Peer pressure has forced many (most? almost all?) business to operate in the second mode.
Interesting to me that at Catholic Mass this morning - in an affluent suburb of Washington DC - part of the homily concerned keeping faith in God despite problems with mortgages, stocks etc. The priest's tone was quite serious.
I've been a Catholic for 20 years and this is the first time I've ever heard a reference to economic matters of this sort - and in this parish too. It's in Chevy Chase, Md.
To argue against sweeping cuts in HELOCS when the underlaying asset prices are declining (already in some areas and potential in many others) by 25 to 30 percent is just silly. That fits any definition of 'sweeping' that I've ever seen.
MY HELOC is about 30% of my home's value in a fire sale and is in first position so there is no reason for the line reduction. Me thinks that WAMU is simply reducing every HELOC in my zip code to the amount drawn or by some forumla whichever is lower and then letting the customer complain.
wamu keeps sending me letters asking me to get a HELOC.
I've got a bunch of equity at today's prices. I just did a cash our refi because I fear the worst and always overprepare for such. My previous HELOC was supposed to be closed after my refi. It wasn't.
Seems odd.
Rich, where do you live? AZ, FLA, CA or NV? With the way corporations work, i can't imagine they are doing anything at banks these days other than blanket moves. Throwing out the baby rich with the bathwater.
"Frederick Cannon and Brian Kleinhanzl, the report's authors, argue such reductions could backfire on lenders, leading to more loan delinquencies if borrowers needed their credit lines to stay financially afloat."
Trader Walt - see this link for a sample of the legal disclosure language. Everyone uses it, because using this language provides you a defense against FTC type actions.
Most will have the full version in the agreement and the short form in the Early. This is a model form from Reg Z, which is the regulation that enforces TILA. The 50% lending decline on equity for the purposes of the line comes from the commentary in Supplement I to Reg Z. This is the link to Reg Z. The most relevant sections are 226.5b, 226.6, Appendix G and the applicable portion of Supplement I.
I do not believe that anyone is getting HELOCs without this language in the documents. HELOCs are one of the most regulated consumer loan products in the US; exactly what a lender can and cannot do is pretty well spelled out to the lender.
Regarding the question about penalties, they vary. The largest risk for not complying with the requirements discussed in the article is essentially loss of interest.
In fact if the consumer can prove that the lender didn't comply with legal requirements, the consumer will have so many options for redress that almost any lender will settle the matter at the first inquiry. Nobody wants to go to court or have to discuss the matter with a regulator on something like this if they really screwed up - it just provides ammo for the next complaint.
Options include complaining to a regulator, going to small claims court, FTC action in state court (this is a slamdunk), etc. Basically you can tie the lender up in knots and cost them way more, so they will practically always fold.
However, I notice some commenters don't understand the difference between a HELOC and other types of housing-secured lines of credit. HELOCs are consumer purpose revolving lines of credit on a personal residence.
Unless you lied on the app, a line on a rental isn't a HELOC and a business purpose loan isn't a HELOC. Other types of lines of housing equity credit have much less in the way of legal protections.
Also, the 50% decline rule relates to the terms applying when the line was extended. If the original HELOC set your credit limit at 90% of equity, a 5% decline in value will produce a 50% drop for the purposes of the line.
So if you bought a home in 2001, and got a line in the amount of 90% of your equity in 2005, you might have had 15%-30% equity. Let's say:
2001: buy at $250,000 with a $225,000 mortgage.
2005: valued AVM 2005 at $500,000, $217,000 mortgage = $283,000 equity. Bank granted $200,000 credit line in 2005. Property was leveraged 83.4% and the dollar amount of the difference between available equity and the credit limit was $83,000.
2008: valued AVM $450,000. The difference between the available equity and the credit limit for the purposes of the plan has dropped 10% or $50,000, which is more than 50% of $83,000. The lender can use 226.56(f)(3)(vi)(A)to block any additional draws or reduce the credit limit. In other words, they can revise limits to stick with the original credit terms.
Because AVMs tend to go high when property is rising and low when property is falling, an appraisal may show higher current valuation. But that may not help a consumer in a bubble area, because the original AVM might well have been high. The lender is not required to obtain an appraisal before doing this.
It is not whether you have equity in the property - it is whether you have as much equity as the lender originally demanded.
If the AVM is wrong the lender is still in compliance, and most lenders will not make the mistake of not having their ducks in a row in such actions. But AVMs don't track original property values well.
Received a letter from Chase about a month ago stating that our (wife & I) were "cut off" from the HELOC we acquired when we bought our home. They had an AVM (automoated valuation model) pegging our value at approx $540K. Within the last month there have been at least 2 sales in the $700,000's. We had a large (relatively I guess) HELOC for around $200K with a ZERO BALANCE. On the back of the the letter it stated we could appeal with an "Official FNMA Appraisal". I spent $300 (chump change for us) and had one done and sent it to Chase with a very brief letter with NO PERSONAL BULLSHIT stating they were in error and had an erroneous value of our home. For those who give a flying shit we owe around the conforming (NOT AGENCY CONFORMING) limit. I pretty much concluded that we would get some erroneous response like "we at Chase Home Equity could really care less about reality and you guys are pretty muc fucked because of our bad policies over the last 5 years that have screwed us royally. Much to my suprise we got a PHONE CALL within ONE WEEK stating that our line had been reopened. Do we need the money? No, we've got hundreds of thousands in savings. Did this give me satisfaction? Hell no it just leads me to believe the banks our much worse than any reasonable non-armageddon mindset would believe. Yes Virginia, there are many middle of the road people who managed their (wealth?) well thru the years where Joey Bag of Financial Folly was in the process of spending decades of income in less than a year and Banks were actually enabling these financial clowns. Trust me, I know many more like me and if the derelicts hoping for pre 2000 prices get their wish...there is no way on God's Green Earth that those "RENTERS" will have the savings or ability to purchase anything buy a binky for their toothless child.
Mad Max - a demonstration of my point, and if you ask, you may be able to get a refund of the appraisal fee. Try it and see what happens.
Contact them and tell them that you have thought it over and believe that it was their error, and that it was not a reasonable error, and that you believe that they should reimburse you for the appraisal. If they say no tell them you will complain in writing and that you may contact their regulatory agency. Then ask them which agency is their regulator. I bet you get your money back.
MaxedOutMama - excellent info and, sigh, oh so true. San Diego bubble owner here and by tale is just as you say, originally high AVM, bubble burst neighborhood, TILA, chapter z well documented in WaMu HELOC contract. Tried the reappraisal route to challenge - WaMu will only accept appraisals from their chosen service provider (LSI) - new assessment came in at exactly at WaMu revised estimate.
If I were you, I would get a couple of appraisals from licensed appraisers, and then wrote a complain. Ask who their regulators are, and send a copy there as well. WaMu should have thought before, and they deserve a kick in their balls.
Is this a first?!!
The FDIC said the Federal Reserve has defined a significant decline to mean situations where the unencumbered equity in a property is reduced by 50 percent or more.
Since when is the Fed involved in defining any sort of threshold level in terms of equity decline? Is this in any way even remotely the Fed's mandate?
theyieldcurve wrote "is this in any way even remotely the Fed's mandate?"
Your question has been noted. The black helicopters will arrive shortly to transport you to your camp. Make sure your family has plenty of Ameros to pay for your food.
"the report's authors, argue such reductions could backfire on lenders, leading to more loan delinquencies if borrowers needed their credit lines to stay financially afloat."
W.T.F.?
The FDIC said the Federal Reserve has defined a significant decline to mean situations where the unencumbered equity in a property is reduced by 50 percent or more, the FDIC said.
this is a huge statement IMO.
I would guess substantial #'s of people in those areas HAVE lost 50% of their equity. Many didn't have equity at all and are now negative equity.
is this the case of the federal regulators not understanding how much equity is evaporating?
The black helicopters will arrive shortly to transport you to your camp.
As I'm in Canada, some sort of extreme rendition event will be required. Should I just show up at the airport? Will there be an in-flight bar service?
In Canada they take you to Bud Camp..........
Looks like a tough choice-- showing tough love to force the debt addicts to keep paying off their arrears, or giving them more junk to keep the high going.
I really don't understand the FDICs recent push. it seems sure to push more banks into failure. (lending to homes in rapidly depreciating markets)
The only way I interpret it is this: they want these HELOCs to be kept open so that people can continue to use them for living expenses, delaying the eventual downturn.
it fits with the govt mantra: "the most important thing is to consume"
so is the FDIC part of this party line? keep the patriots consuming to keep the system going long enough until something (what?) can "fix" this?
or are they just trying to defer the pain until 2009?
or is this a coordinated effort. use the Fed to bail out the banks, HOWEVER the price of this is that the banks have to loan out to deadbeats? we've often discussed "pushing on a string", but perhaps this is a workaround for the pushing on a string problem. mandate that the companies lend?
I really don't understand the FDICs recent push. it seems sure to push more banks into failure. (lending to homes in rapidly depreciating markets)
The only way I interpret it is this: they want these HELOCs to be kept open so that people can continue to use them for living expenses, delaying the eventual downturn.
it fits with the govt mantra: "the most important thing is to consume"
so is the FDIC part of this party line? keep the patriots consuming to keep the system going long enough until something (what?) can "fix" this?
or are they just trying to defer the pain until 2009?
or is this a coordinated effort. use the Fed to bail out the banks, HOWEVER the price of this is that the banks have to loan out to deadbeats? we've often discussed "pushing on a string", but perhaps this is a workaround for the pushing on a string problem. mandate that the companies lend?
But on the other hand bank regulators will insist banks reduce their leverage to match their reduced capital.
What's a banker to do? He's got lots of bad debt he must set aside loan loss reserves for. He can't find any new capital.
He's in no different a situation than the overextended homeowner. He's broke too. What's he supposed to lend?
The bulls say the credit crisis is over. This is part 2, where comsumers start feeling it.
Yearning To Learn --
I really don't understand the FDICs recent push. it seems sure to push more banks into failure.
Perhaps cutting HELOCs, while a good idea for any individual bank, is actually a bad idea for the banking system as a whole.
Or more precisely, perhaps that is what FDIC believes.
Nemo, cutting HELOCs on credit worthy borrowers with plenty of equity is classic credit crunch stuff - and definitely bad for the economy. That is why the FDIC wants the banks to do it on a case-by-case basis.
Of course the banks are using their computer models for valuations, and that isn't the best method.
Best Wishes.
It seems like the banks can't/won't do anything on a case-by-case basis. They don't have the manpower. That's a good part of the reason why we're in this mess.
There are a whole lot of fat kids getting slapped away from the table becase a couple of them craped in their pants.
Beep boop boop ...
computer ready....
mark to model process working....
input asset purchase value
input asset valuation model
input fudge factor
ignore valuation model if asset
CR<
"If homeowners were using their HELOCs to pay their first and second mortgages"
IF!?! Those with tons of equity aren't availing themselves to such sillines. They have savings as well as equity. Those with equity are not in need of HELOC. IMO.
Cheers,
If the examples in the article are representative, this is an absolutely rational move by the banks. The FDIC is insane.
what's wrong with using me HELOC to pays me bills. The bank gave me the money so I as better spend it right?
Are HELOC withdrawals counted towards 'encumbered' equity?
I guess my question is this...
$500k property w/ $400k mortgage = $100k equity. HELOC of $100k of which $75k has been spent. Is the unencumbered equity sitting at $25k?
I'm not sure Ms. Bair understands her agency's function.
Is she even responsible for enforcing the Truth in Lending Act? As far as I know the FDIC exists to insure the money of bank depositors not guarantee the credit lines of its debtors.
A bank's capacity to lend is finite. To demand that it go beyond those limits is to jeapordize the funds of depositors and that cannot be the call or function of the FDIC... can it?
Given that banks do not any documentation of the financial situation for many of the loans that they have given out, how in the world are they going to know when such a chance occurs ?
Regards,
Calculated Risk writes:
"...the FDIC wants the banks to do it on a case-by-case basis."
It's going to be case by case all right; one month's Case-Shiller charts to the next, showing home prices declining 2%plus/month, suggest it'll only be a matter of months until the FDIC can go state by state, starting with CA, NV, AZ and FL.
Next case?
"I really don't understand the FDICs recent push. it seems sure to push more banks into failure. (lending to homes in rapidly depreciating markets)
The only way I interpret it is this: they want these HELOCs to be kept open so that people can continue to use them for living expenses, delaying the eventual downturn."
Exactly. That's the point. You believe Sheila Bair is an apolitical technocrat? The FDIC is different than any other W/Cheney admin agency?
Apres 2009-01-21, le deluge.
Family member and I have WAMU HELOC lines, we both got reduction notices today. Interesting, WAMU reduced their line to what they owe and mine to what I owe. In both cases, based on home purchase in 2001 and comps in area there is no justification for the decrease. In fact, my HELOC is in first position.
Shoot first and ask questions later....
The law is the law. Both parties agreed to the law when they signed the contracts. The Banks then decided they were going to make their own law and a stick has appeared telling them to reconsider.
While still unlikely, these actions combined with other illegal and quasi-legal actions are a step closer to either the government or the courts telling banks that whole segments of loans are no longer enforceable and forcing a re-negotiation of the loans or a forfeiture of the loan.
Certainly there are individual cases where responsible people have had their HELOC taken away, OTOH, you can go over to the Irvine Housing Blog and look at an unending number of people who HELOCd a lifetime of equity away or did who knows what with the money.
so, a white guy is the best rapper, the germans donw want to go into a war and regulators are encouriging the banks to extend credit to borrowers so they dont default.
one question tough for the regulators, how to assure that the borrower doesnot decide to spend his heloc to pay a leasing payment for a lexus instead of the mortgage?
Rich,
Can you disclose what your total home encumbrance as a percent of home market value?
I have an undrawn HELOC from WaMu in first position with no other encumbrances. They haven't reduced it. The line represents 70% of market value.
It seems like the banks can't/won't do anything on a case-by-case basis. They don't have the manpower. That's a good part of the reason why we're in this mess.
-Koolaid
I have noticed quite a few employment ads lately for banks wanting experienced mortgage originators. Not sure they got rid of the old ones and need new ones or they need more people to do refi workouts. I'm guessing the latter. Whenever a housing bill eventually passes I bet they will be swamped.
What's the Banker's algorithm?
For all involved in mortgages, there's a pretty lively discussions and insight going on here :-
Mr. Mortgage’s Guide to the TRUTH!
Do have a peek.
More bailouts on the way.
I don't understand the complaints about FDIC here. Bair is well within her appropriate agency function to make sure the institutions she supervises stay on the right side of TILA.
Here's the short version: Truth In Lending Act (TILA) is a federal law. It applies to all lenders, regardless of who supervises them. The TILA statute itself happens to give the Federal Reserve the explicit authority to implement the law by writing the regulations. Reg Z is the set of regs that implement TILA. All the agencies that supervise depositories (FDIC, OTS, OCC, NCUA) have to make sure their supervisees follow Reg Z.
(Not all federal lending law is implemented by the Fed, although a lot of it is. For instance, RESPA explicitly gives regulatory authority to HUD, not the Fed. So all RESPA-related regulations are promulgated by HUD. That's just the way these things are done.)
However, a lot of regulatory guidance comes out as "interagency policy," meaning that all the supervisory agencies get together and jointly produce policies that cover all regulated depositories. The HELOC guidance from 2003 is an interagency document, like the Nontraditional Mortgage guidance from 2005.
The thing about the Fed's definition of "significant decline" is that that's the kind of thing any of the regulators do: they take a fairly vague term in the regs like "significant decline" and come up with a rule of thumb for what constitutes "significant." Otherwise, you'd have one go-go bank defining "significant" as 100% and one constipated bank defining it as 1%. Sure, it ends up being somewhat arbitrary, but that's the alternative to chaos.
The whole idea of basing the definition of "significant decline" on unencumbered equity, not total property value, is exactly designed to hit high-LTV loans first and let low-LTV loans go as as long as possible.
Imagine you have two properties originally valued at $100. One has $80 in total drawn-down liens; the other has $60. The property value falls by 10% to $90.
The first borrower experienced a 50% drop in equity (from $20 to $10). The second borrower experienced a 25% drop in equity (from $40 to $30). The first borrower gets his remaining LOC frozen; the second doesn't.
That's as close to "case by case" as you're going to get in a regulatory policy document.
Is there not an appeals process if the bank cuts off the HELOC to get it re-instated. I would think a lot of small businesses use HELOCs. The problem with HELOCs is they can be borrowed against without any specified purpose, I wonder if the banks could add in conditions of usage?
Regarding the FDIC mandate, perhaps they have done some modeling which shows what happens to deposits if HELOC's are withdrawn, thereby exacerbating liquidity concerns? Don't know this, just speculating.
And with regards to help wanted ads at banks, they are and will continue to beef staffs for workouts, particularly those that will move assets to the GSE's.
The problem with HELOCs is they can be borrowed against without any specified purpose
No, that's the definition of a HELOC. They are called HOME EQUITY lines of credit because that's the issue and the only issue.
People who want small-business funding can get commercial lines of credit that are not secured by their homes. Unless, of course, their business doesn't show enough value for that.
There is no way on this earth anyone is going to "reinstate" a frozen line of credit because it is being used to prop up a stuttering small business. The HELOC isn't secured by the business, it's secured by the house. If the business has decent prospects, then these folks should apply for a business loan. If the HELOC is just making the house payment because the business doesn't cash-flow enough to support its owner, then it's time to freeze the thing.
I've made a small fortune, and you've squandered it all.
You've shamed me till I feel about one inch tall.
But I thought I loved you, and I hoped you would change,
so I gritted my teeth and didn't complain.
Now you've come to me with a simple goodbye.
You tell me you're leaving, but you won't tell me why.
We're here at the station and you're getting on.
And all I can think of is.........
Thank God and Greyhound you're gone!
So basically, it's like a "run on the bank" (ala It's a Wonderful Life), but inverted?
I don't think the banks would have much problem making their case. It is nice of the FDIC to have high-class worries, but they need to be careful - if the default rate on HELOCS surges, the FDIC will look like it set banks up for failure, much like Greenspan pushing ARMs when interest rates were at a historic low.
I don't think there is anything wrong with the logic here at all. whacking HELOCs without regard to the underlying value IS bad for the economy. And if my value holds, if i want to use the money for whatever (at 4% now I might add) instead of using other credit means because it is cheaper, then that's good for the general economy. And for me.
This knee-jerk blah blah blah on this thread misses the point. The point is this is a sign of a credit crunch. how you feel about HELOCs personally governs your own behavior but no one else's. In the macro-context this points to the fact that banks are scared of their own shadow on the one hand, and possibly unable to lend on the other.
Read that last sentence again and let the impact of this roll around in your heads a bit. WaMu is, perhaps, doing this because they don't have the capacity to lend, and they don't have the capacity to bear any losses even from good outstanding HELOCs. That, everyone, is the issue here. Not regulation and not your personal credit philosophies.
Good to hear from you Tanta!
"whacking HELOCs without regard to the underlying value"
Are the banks really doing this? You certainly can't blame banks for reducing lines for those with high LTVs in depreciating locations. It also makes sense to project and consider further declines.
It's not like you are forced to do buisness with WaMu. Home ATMers can always shop around.
i'd agree allenc. i have a HELOC that is untapped but even now is more than fully supported by the value, and likely value. i would view it as suspicious if it got cut, because there is no reason to do it.
on the other hand, i had a credit card with a 25k limit on it, also pretty much untapped, that had it's line reduced down 10k. i thought that was suspicious too (BOA i'm talking to you) because, ya know, i am the sort of guy that any lender would probably want. and if they did that to me, what are they doing to others? in a macro sense here too, this is really, really bad. what BOA just said to me is we're screwed...because, you know, if people don't borrow, how are they going to keep the numbers up?
All of this points to a severe credit crunch, and this is way bad with the economic numbers being what they are. but from a personal perspective it might force people to change behaviors. the big question is will people ever view credit the same way again? if they don't, the banks are signing the next couple of decades away on the profit front.
Ron Paul published a very strange piece this week entitled:
Something Big is Going On
Campaign For Liberty
Blaahhh, the banks are almost all insolvent right now (and probably have been since last August and before).
So all this would do would be to make them more insolvent.
In practice, my small business clients find it totally impossible to
get financing. A few can get money from the SBA. Small business people get financing from savings, relatives, loan sharks,
mortgaging the house, credit cards, and I knew one who financed (years ago when this was possible) by check kiting. Getting a small business loan from an institutional lender--a waste of time. I would never advise a client to even try.
By the time it is possible to get a bank loan, you are a medium to largish business.
ipodious,
"In the macro-context this points to the fact that banks are scared of their own shadow on the one hand, and possibly unable to lend on the other."
Oh yeah! They can't lend. And they won't. The days of EZ credit are over.
Cheers,
Canadian watching with popcorn writes:
"the report's authors, argue such reductions could backfire on lenders, leading to more loan delinquencies if borrowers needed their credit lines to stay financially afloat."
W.T.F.?
Right there with you. The banks have realized they're paying the interest via the new loans. How dare they stop that.
Vadar:
Yes, the banks are making new 'laws.'
But if they do not, they go under. This is another variation of the prisoner dilemma. But in this case, since its the death penalty on the line, they had no choice but to talk (cut loans).
I like Max Dama's analogy. This is the reverse of a bank run. We've been talking about the bankers getting pucker butt for years! Now this is what it looks like when it happens.
Got Popcorn?
Neil
I'll second lawyer liz's comments on small biz loans.
To get one you need show that you are making the kind of money that would make it unnecessary to borrow more.
I know of one recent example of a company having cashflow issues. They manufacture parts for mass transit vehicles. They asked the bank for a line of credit. the bank said , "sure, all you need to do is put up liquid assets in the same amount as collateral". They'll loan you the cash if you give them that much cash as collateral. Not very helpful.
Well, the top 1% better pick up the slack or there are going to be some ugly consumer spending numbers in the next year.
Small business people get financing from savings, relatives, loan sharks,
mortgaging the house, credit cards, and I knew one who financed (years ago when this was possible) by check kiting.
Are you sure that's an effect, and not a cause, of institutional lenders' unwillingness to make certain kinds of small business loans?
I agree that it's much harder to get a small business loan than it is to get a HELOC. The price you pay is that when you run out of HE you run out of LOC. Then you get these people who think they have "established" a business (which has run for a couple of years on HELOC and check-kiting), and who are just shocked that the commercial loan department doesn't want to make a loan to them because they're already overleveraged.
Mortgage lending is crazy enough. I'd shoot myself if I had to deal with small business lending.
OT from previous thread regarding everbank and foreign currency diversification:
re: everbank
They are NOT Ok - one negative is their 1% commission in AND out of the dollar that ends up being charged during the foreign currency transaction ( - they say their rates are within 1% of the wholesale rate but it ends up AT 1% AGAINST you).
Compare this to the bid/ask spread of a currency ETF like FXE, FXA, FXF, FXY; the annual fee for these ETFs is around .45% - not too shabby.
As regards their CD interest rates, be very careful ! I'm stuck in a (small) Icelandic Krona position with them with a very low CD rate - this when the Icelandic CEntral bank has overnight interest rates at 16.5%; 7 day CD rates at 15.25%
Central Bank of Iceland » Front page
The rate offered by Everbank 2.5% ? Bleeding robbery I call it. Yet they say they guarantee competitive rates.. I'm working through my issue by moving that holding to Kaupthing Bank - but that's another negative with Everbank - I can't transfer the krona directly - it has to be converted BACK to the US$ and then back again to krona ( so more vigorish( bid/ask spread) at either end ).
I'd be very wary of them.
For currency diversification I'd look at all the ETFs I mentioned earlier - there are many others - For Chinese there is CYB.
An interesting, very recent ( two weeks old ) ETN( yes etN - do your own diligence on the differences ) is PGD ( i.e pegged).
This is equally weighted on the Saudi Arabian, UAE, HK, Singapore and Chinese currencies - all currencies that are tightly pegged or held in a narrow band to the US dollar.
The thesis is that it their pegs will break or the float band widened as the try to battle the inflation caused by the peg to the US dollar.
-K
I know of one recent example of a company having cashflow issues. They manufacture parts for mass transit vehicles. They asked the bank for a line of credit. the bank said , "sure, all you need to do is put up liquid assets in the same amount as collateral". They'll loan you the cash if you give them that much cash as collateral. Not very helpful.
What these folks fail to understand is that the HELOC lenders presented them with the same deal: put up collateral (home equity) in at least the amount of the loan and you're approved. But for some reason they found this deal "very helpful."
Tanta,
"Are you sure that's an effect, and not a cause, of institutional lenders' unwillingness to make certain kinds of small business loans?"
Cause. If yo're running a small business on HELOC, you're toast. That loan should be based on the business not some asset owned independently.
Why do people do such silly things?
Cheers,
If yo're running a small business on HELOC, you're toast.
Ummm Misean. two friends of mine and I started and ran a business off HELOC money for over a year before cashflow made it possible to pay them off. Then we sold it off for some pretty decent dough. What experience do you have?
Why, oh why do people conflate all these issues and try to tell others how to use leverage when they have no idea or personal chops to go on? What, do you think you just walk into a bank with a good idea and they give you money? No, you start it by maxing your credit cards and your house. Welcome to being an entrepreur. You put up your own cash and assets because you have skin in the game and you believe. Banks only lend to people once they have a track record.
Tanta,
I hope you're feeling better. It's good to have you back.
If you have the time could you do a piece about the Community Reinvestment Act, redlining and racism in lending?
ipodious,
Fier gluck mate,
Cheers,
"had it's line reduced down 10k."
In this environment, the wise banker cuts back on unsecured lending.
Thanks Ipodius,
A HELOC can be an excellent source of seed money for a great idea. As I recall, Steve Jobs mortgaged his house to start Apple.
misean, i'm just saying that sweeping generalizations aren't helpful. there are lots of good reasons to use a HELOC and a lot of bad ones. I view starting a business as a good one both on the personal and macro level. especially the macro level.
on the one hand people here scream about loans being bad because there was no skin in the game. ok. so now you say that it's stupid to use a HELOC to fund a new business venture? What better skin in the game than the equity in your house? in fact, i guarantee you that no one, no investors, venture cap or anyone else will even talk to you if you didn't go this route. why? skin and belief in what you're doing.
In fact, I'd say this was the best way to use your HELOC if you have a solid idea. only followed by value-enhancing home improvement, education, or other economic benefit.
In this environment, the wise banker cuts back on unsecured lending.
I know allenc but jeez...it just struck me that they used flawed models on the way up and learned nothing on the way down here. there is no way anyone would touch my credit line if they used good ones. frankly i don't care because who needs 25k in open credit on a card. but it just strikes me as being really dumb about how to apply the formula. i'm actually someone that can pay it back.
Oh heaven help us their going to take our HELOCs away.
Man what an epic OC whiner parade.
If you continue to need credit to stay afloat, doesn't that make you insolvent?
"how to apply the formula."
It may not be much of a formula other than a rule to hack larger, unused lines down.
ipodious,
et. al. I appollogize. I'll stop posting until I sort things out. A dear family member has passed.
Why am I even posting?
Confused...
Catch up later.
Cheers,
Perhaps any HELOC agreement should begin with a warning that the bank can withdraw or cut back the HELOC at the bank's discretion leaving you, the homeowner,without funds the HELOC was expected to provide.
I hope you're feeling better. It's good to have you back.
Thanks. I'm feeling rather better today.
If you have the time could you do a piece about the Community Reinvestment Act, redlining and racism in lending?
I'm not feeling that much better.
All you're going to get is the Shorter Tanta on CRA: the underlying concept of the law--that if you take deposits in an area you must "reinvest" them in loans--not just mortgage loans--in the same area, is to me so self-evidently sensible, fair, and economically necessary that I don't get the ruckus over it. Of course there are plenty of demagogues out there who like to describe CRA as the thing that started all the high-risk lending. CRA isn't even a specifically home mortgage lending law; it applies to any bank lending, small business, credit cards, car loans, construction, you name it.
There are a lot of people, in my view, who would not have gotten toxic overpriced risky subprime mortgage loans if the depositories hadn't abandoned their neighborhoods. It isn't just that they'd probably have gotten a better mortgage loan from a depository; it's that if they had had access to responsible "starter credit" like a secured card, a used-car loan, a small personal loan, and had been able to build up a strong credit history with a bank they also had deposit accounts with, they'd have qualified for better financing and have quite possibly learned something about managing payments.
If CRA has anything to do with the subprime debacle, it's that banks pulled their deposit-taking branches out of low-income neighborhoods to keep from having to make loans there. That left no one but subprime brokers, payday lenders, and other loan sharks to cover those markets, and a lot of people were left vulnerable to fraud and exploitation.
I was on a bank CRA Committee for years, and I never believed that CRA made me make bad loans. It made me think long and hard about what "reinvestment" means. Surely there were many lenders who didn't think long and hard about it, they just decided it wasn't "worth it" to keep a branch with "nickel-and-dime" deposits in an urban or rural neighborhood and put loan officers there to make "nickel-and-dime" loans. So they left it to the usurers. In any just world that would have cost them their bank charters.
So your HEL was used as "skin" in your business venture...
Now your "skin" got Zillowed out and your lender finds out that he's the one who's been skinned. All you lost was something that you never really had in the first place; illusory equity.
Can you blame him for not wanting to dig the hole deeper.
What these folks fail to understand is that the HELOC lenders presented them with the same deal: put up collateral (home equity) in at least the amount of the loan and you're approved. But for some reason they found this deal "very helpful."
I fully understand that you are putting up collateral for a HELOC. I don't consider a home to be a liquid asset, though. In this instance they said if you can show us you have $600,000 that we can keep as collateral, we'll loan you $600,000. I don't see the point in that.
I've started two businesses. One on savings and credit cards. That one failed. The next one I used my home equity. That one worked out pretty well.
I've been trying to get the fed to take my unsold inventory from the business that failed and give me cash in return, so far they aren't willing to do that.
Hi, Tanta!
Conjure Bag sends his regards as well.
Best wishes, Misean.
misean, i'm honestly sorry to hear that. please be well and take care!
Very good to read your loud and clear again tanta! -- (and sorry to hear misean)
I have a question on this -- if the banks can't get their computer models to behave, what will the fdic do about it? What's the usual justice meted for TILA violators?
May I remind our readers that access to credit is a right that is inalienable. When we told the brits to stick it we also said:
"We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and Access to Credit."
Perhaps any HELOC agreement should begin with a warning that the bank can withdraw or cut back the HELOC at the bank's discretion leaving you, the homeowner,without funds the HELOC was expected to provide.
I'm curious why you think they don't say that. I doubt it's the very first thing they say, but I don't doubt that they say it somewhere. Just like how your credit card agreement says your limit can be lowered and under what circs.
I will say there are a lot of small businesses started off credit cards and HELOCs that are sucessful. Personally I give start-up and bridge loans to small businesses because the bank will not talk to them. A recent line of credit I issued was to a small food processer who needed money to buy commodities for inputs. It takes them about 6 months from purchasing materials to getting paid from the retailer. A long as the process makes a profit equal to the principle plus interest after expenses, the company is good for it. They went to talk to the bank and they said it was too small. Funny that banks are useless in this situation because this is where the majority of the US business growth stems from.
This discussion indicates to me that everyone needs to re-think their strategies, particularly in this new environment.
Sure, everyone has a story about some "brilliant" entrepreneur who started a business with HELOC money or credit cards.
Cisco, for example, was started by maxing out a number of cards. They were called "geniuses" because it worked. If their scheme hadn't worked, they could have been prosecuted for credit card fraud.
A lot of the psychology behind these sorts of strategies also involves expectations. Too many want too much, too soon.
Having worked both sides of the financing business, I can tell you that I would never use a bank or venture capital firm. The banks will strangle an idea at the first hint of trouble, and the venture capitalists want your first-born child as part of their reward for patience.
Patience is what financing a new business is really all about. So, people borrow or bring in venture people because they don't have the patience necessary to let the thing grow naturally.
Now, if time is absolutely of the essence and you can't do it any other way, I suggest finding private money. I mean individual investors who have seeded new businesses before, have their heads screwed on, and know what to expect.
Yes, they'll expect you to have "skin" in the game, but it needn't be cash. It could, for example, be a patent or copyright, what have you. So-called sophisticated investor have no interest in making you feel pain; they simply want to see commitment.
Finally, I much prefer the Alfred Krugg mindset, but that's a story for another time.
Neil
Yea you are correct, they are at death's door if they do not cut lines of credit, fast and in bulk. OTOH they expect the average joe to obey the law even if it destroys joe.
MoT,
Thanks for an example highlighting liquidity vs. solvency - to ipodius' point if I parse him correctly - the withdrawal of credit willy nilly can exacerbate the damage to the economy by taking down otherwise sound enterprise's in a liquidity squeeze...
"Krugg" should be "Krupp."
Sorry, my bad.
OTOH they expect the average joe to obey the law even if it destroys joe.
the average joe probably wouldn't have any issue with obeying the law if certain lenders hadn't given him the rope to hang himself (and, it would seem, to hang the lenders as well).
Before its all over with, this may become an all hands lynching.
Tanta
Yea, all those financial institutions found it more profitable to play games with derivatives, CDOs and other exotic financial instruments while packaging and selling crap loans for the fee; instead of minding the nickels and dimes of 'real' banking. Real banking is not high profit. But all the exotic stuff really pumped up the old bonuses.
Tanta, I don't doubt that both say it somewhere in the several pages of legalese. I just thought that it should be first in big bold capital letters. (and make the borrower initial it and/or sing it out loud.)
'don't have a HELOC but have credit cards. Can't say that I ever remember seeing this statement, but, like i said, I'm sure it's there somewhere.
I have a question on this -- if the banks can't get their computer models to behave, what will the fdic do about it? What's the usual justice meted for TILA violators?
I'm not sure I understand the question.
TILA is basically a disclosure law: it mandates what you have to tell borrowers up front, and what the closing docs have to say, before you can obligate someone on a loan.
So TILA says that if you make an "open-ended" loan (ie, a line of credit involving future advances), you have to disclose the circumstances under which the lender may refuse to provide those future advances. The whole idea of TILA is that you can't just change the terms of the loan after the closing willy-nilly. So if the note the borrower signed says that the line limit can be decreased or frozen if there is a "significant decline" in the value of the house, then it is not a violation of TILA to do that.
Nobody is going to get busted for a TILA violation if it turns out they froze a HELOC when the decline in borrower equity was 49% instead of 50%. Nor is anyone going to get a TILA bust because the Case-Shiller AVM showed a 10% value drop but the Freddie Mac HVE model showed 9%.
TILA itself doesn't say anything about how lenders manage their models or calibrate them or set confidence scores or anything else. That is covered in other regs, such as the HELOC guidance (and the Nontraditional Mortgage guidance, as well as other basic safety and soundness regs covering home mortgage lending). TILA just says the lender has to have a factual basis for changing the loan terms: it can be a traditional appraisal, an AVM, a broker price opinion, or a tax assessor change. You really only get in trouble from a regulatory perspective if you mix and match what kind of valuations you use on any given day.
We all need to bear in mind that most HELOCs used an AVM to set the original credit limit. It's not like we're changing the "factual basis" in the middle of the game.
If I understand what FDIC is saying here, they're just pointing out that a lender cannot do an "across the board" freeze or reduction of its HELOC accounts in the aggregate, on a portfolio basis. You've got to run the AVM on each house, and calculate the equity decline for each loan.
My guess is that the way it usually works, the geeks go run bunch of reports to identify high original LTV loans in MSAs or zip codes or whatever that are experiencing declines. Then they run individual AVMs on only those loans. So the methodology is a combination of MSA-based (to find the population of possibly troubled loans) and "case by case" based. FDIC is reminding everyone that you can't just panic and skip the second step, because then you would run afoul of TILA, which doesn't let you change loan terms without specific factual grounds.
I just thought that it should be first in big bold capital letters. (and make the borrower initial it and/or sing it out loud.)
Well, the problem is that there are too many things we are now required by law and regulation to put first in big bold font. Unfortunately, you cannot put all the loan terms and conditions first, unless you change the note format to a Moebius strip.
Fer instance: every ARM note used in every ARM closing in the last couple of decades has not just bold but ALL CAP BOLD paragraph on top of page one saying YOUR INTEREST RATE AND PAYMENT MAY CHANGE.
And what do we get? A bunch of folks who signed that and thought they were getting a fixed-rate loan.
quasi vulture's shopping hard...
more soo
Tanta, glad to see you are feeling better!
That makes me very happy.
Best to all.
About note verbiage . . .
I used to do a lot of mortgage biz in Iowa. For many years IA notes had to have this "No Oral Agreements" verbiage on them, the point of which was to remind borrowers that only the terms of the doc they were signing were part of the loan, and that oral agreements not reflected in those docs were unenforceable. (Such a warning might have helped some of these "they promised I could always refi" people.)
State law didn't say where you had to put that, just that it had to be "conspicuous." We always put it at the very end of the note, in big bold caps, right above the signature lines. The theory being--and I'm sure we were right--that not everyone will read page one of a four-page note, but they have to clap eyes on the last page in order to sign it.
Of course you'd run into the same problem that everyone wants every important warning to go right above the signature lines.
The bad news is that everyone needs to read the whole thing all the time.
Tanta,
Now I see your point. But I think on my credit card agreement this explanation is located near the end after the disclaimer on famines and before the paragraph on astroprojection.
so ipodius, I'm not sure i understand your argument.
I totally agree that decreasing HELOCs will decrease access to credit for the average homeowner. decreased MEW will cause decreased spending/consumption.
however, wouldn't you agree that over-HELOCing has been part of the PROBLEM? I fail to see how opening the credit spigots again is a good thing.
what is the end point?
But I think on my credit card agreement this explanation is located near the end after the disclaimer on famines and before the paragraph on astroprojection.
Which problem, by the way, is only going to keep getting worse. All that stuff is an accretion following various and sundry crises and catastrophes in years past, during the fallout of which everyone started to claim that "no one told me" that this could happen. So every year, on average, CC lenders added yet another covenant to their credit agreements.
Mortgage docs have, by and large, been a lot more stable than that, but that's because we keep adding extra "disclosure forms" to a heap of papers, instead of adding more and more covenants to the security instrument or note. Hence the problem of people "not having time" to read a big stack of papers at closing. Even though most of that stack has to be provided within three business days of application, you still need to read what you are presented with at closing to make sure it matches what you got up front.
At some point people have to start taking the position that financing a home isn't something you do every other week, it's a big debt and has profound impact on your financial future, and you just have to demand time from you lender to read the docs and you have to refuse to sign if you don't understand. I always get people saying you need a lawyer to follow most of this stuff and not everyone can afford a lawyer. I am inclined to think that there are plenty of people right now who would be grateful to have gotten out with only a couple hundred bucks to a lawyer who encouraged them not to sign that note.
Hi guys, just thinking out loud here. Regarding business start-ups and helocs and credit cards.
In the run-up to the bubble and during it seems to me that any business plan using such money was a no-brainer. Any trouble, re-fi or sell.
Now that the bubble rubble is facing us wouldnt that be one of the riskiest almost braindead moves to make? Sure there will always be a good idea with the right person to implement it but honestly how many businesses that relied on helocs were like that and how many were make your own candles, or doggy bakeries or crappola foufou boutique things?
Now when trouble comes there is no escape.
Needs.
Shelter, food, water, health
Anything that can snatch any or all of these away are to be avoided right now, right? Why voluntarily put these out on the block? Ulcer city
like i said, rambling.
the posters here seem like competent individuals who generally make decent choices and are able to make/do things. Re-read some of these sob fests that are newspaper articles and thnk about these people. they do not seem the competent savvy type, they seem more like they need a survival list made for them and someon assigned as their designated payee.
Does anyone know where, traditionally, WAMU has gotten the money it uses to fund HELOC withdrawals? Has this been drying up recently? Any chance they're using "prudent risk reduction" as a cover for "we're out of cash"?
Lemme reword - if a bank continues to do "shotgun style" heloc freezes, and in doing so freezes some clients in violation of TILA - what are the possible consequences to the bank?
Just wondering about the teeth in the warning.
CR et al.,
I used the search feature, but haven't found anything yet. Have you done any postings analyzing the impacts of historical credit crunches? We talk a lot about this particular credit crunch, but I'm interested in understanding more about previous contractions (e.g. duration, severity)
Thanks in advance for pointing me in the right direction.
Alo said: "... what are the possible consequences to the bank?"
Someone else is more qualified to answer the question of the potential penalty to the bank, but I can tell you of my experience as an individual loan officer.
If we made and error, outside a tolerance level, on a TIL Disclosure, we would incur a compliance fine of $250. There were many other ways to incur compliance fines as well.
Habitual offenders were promptly made available to our competitors.
$250 may not sound like much in the overall scheme of things, but it was a lot of dinosaur eggs back in the day!
Lemme reword - if a bank continues to do "shotgun style" heloc freezes, and in doing so freezes some clients in violation of TILA - what are the possible consequences to the bank?
They'd probably just get a snotty audit report from the regulators and be directed to "unfreeze" any account that wasn't handled properly, unless of course the bank went back and got an individual AVM on one that was handled "shotgun" and discovered that the freeze was perfectly called-for.
I doubt there would be much other penalty; this is a regulatory error that is pretty easy to "put right" simply by unfreezing the account. It would be hard to show that you were truly "damaged" during the time the account was frozen, unless you showed that, um, you were unable to make your mortgage payment during the freeze or something, and if you showed that they could probably freeze your line again on the "material change in borrower's financial conditions" grounds.
That said, someone will undoubtely sue--hoping for class certification, too--on the grounds that even a temporary freeze of a HELOC caused them unbearable anguish about their future financial prospects.
Speaking of using HELOCs to pay mortgages, does anyone remember Ted Haggard, the evangelical preacher from Colorado Springs (natch) who was ousted after it turned out that he was seeing a Denver masseur for drugs and happy endings?
Turns out Ted is now an agent for something called United First Financial, a Utah-based multi-level marketing scam that sells a $3,500 software package purporting to "optimize" the use of a HELOC to make principal payments on a mortgage.
Look in the upper-right hand corner of this website and you'll see Ted's name and Scottsdale, AZ phone number. He's since returned to Colorado Springs, but a "whois" search shows that the same person controls that site on Ted's main website, which has only a mournful picture of Ted in a field, meditating over the loss of his tent-revival empire.
When Ted was defrocked, I figured he'd wind up selling cars. But no, he's selling software in the Amway style, trying to squeeze the last drops out of the dying mortgage market. Poor Ted. Your timing isn't very good on this one. And the car market stinks. Have you thought of a new career in taxi transportation?
My post was a little garbled. I meant to write:
" ... a "whois" search shows that the same person controls that site AND Ted's main website ... "
Sunny summer Sunday. Money in the failing bank. Tanta talking FDIC trash. Life is good again...
Tanta, as usual your answers make me laugh and learn at the same time- thanks! Hope you are healing nicely and with a little somethin somethin to ease the pain.
If you continue to need credit to stay afloat, doesn't that make you insolvent?
Weather Helm, I think you've put your finger on a critical problem with our economy as a whole, not just housing. There is a big difference between missing opportunities because you can't get a loan and going bankrupt. Peer pressure has forced many (most? almost all?) business to operate in the second mode.
Say goodbye to the King of HELOCs..."Notso Wells" Fargo.
$84B HELOCs into a $48B shareholder equity base. YIKES! Warren Buffett's "declining Empire" may have to take action at some point?
California, Wells Fargo's home base, is sinking into the Pacific....and it's not being driven there by an earthquake, if you get my drift!
Do your own due diligence. IMHO.
Interesting to me that at Catholic Mass this morning - in an affluent suburb of Washington DC - part of the homily concerned keeping faith in God despite problems with mortgages, stocks etc. The priest's tone was quite serious.
I've been a Catholic for 20 years and this is the first time I've ever heard a reference to economic matters of this sort - and in this parish too. It's in Chevy Chase, Md.
To argue against sweeping cuts in HELOCS when the underlaying asset prices are declining (already in some areas and potential in many others) by 25 to 30 percent is just silly. That fits any definition of 'sweeping' that I've ever seen.
Alan C,
MY HELOC is about 30% of my home's value in a fire sale and is in first position so there is no reason for the line reduction. Me thinks that WAMU is simply reducing every HELOC in my zip code to the amount drawn or by some forumla whichever is lower and then letting the customer complain.
Thanks
mp
i hope your admiration of krupp ends with just his ability to build a business and his knack for innovation in the metals world.
wamu keeps sending me letters asking me to get a HELOC.
I've got a bunch of equity at today's prices. I just did a cash our refi because I fear the worst and always overprepare for such. My previous HELOC was supposed to be closed after my refi. It wasn't.
Seems odd.
Rich, where do you live? AZ, FLA, CA or NV? With the way corporations work, i can't imagine they are doing anything at banks these days other than blanket moves. Throwing out the baby rich with the bathwater.
"Frederick Cannon and Brian Kleinhanzl, the report's authors, argue such reductions could backfire on lenders, leading to more loan delinquencies if borrowers needed their credit lines to stay financially afloat."
Where do they find these financial geniuses?
Trader Walt - see this link for a sample of the legal disclosure language. Everyone uses it, because using this language provides you a defense against FTC type actions.
Most will have the full version in the agreement and the short form in the Early. This is a model form from Reg Z, which is the regulation that enforces TILA. The 50% lending decline on equity for the purposes of the line comes from the commentary in Supplement I to Reg Z. This is the link to Reg Z. The most relevant sections are 226.5b, 226.6, Appendix G and the applicable portion of Supplement I.
I do not believe that anyone is getting HELOCs without this language in the documents. HELOCs are one of the most regulated consumer loan products in the US; exactly what a lender can and cannot do is pretty well spelled out to the lender.
Regarding the question about penalties, they vary. The largest risk for not complying with the requirements discussed in the article is essentially loss of interest.
In fact if the consumer can prove that the lender didn't comply with legal requirements, the consumer will have so many options for redress that almost any lender will settle the matter at the first inquiry. Nobody wants to go to court or have to discuss the matter with a regulator on something like this if they really screwed up - it just provides ammo for the next complaint.
Options include complaining to a regulator, going to small claims court, FTC action in state court (this is a slamdunk), etc. Basically you can tie the lender up in knots and cost them way more, so they will practically always fold.
However, I notice some commenters don't understand the difference between a HELOC and other types of housing-secured lines of credit. HELOCs are consumer purpose revolving lines of credit on a personal residence.
Unless you lied on the app, a line on a rental isn't a HELOC and a business purpose loan isn't a HELOC. Other types of lines of housing equity credit have much less in the way of legal protections.
Also, the 50% decline rule relates to the terms applying when the line was extended. If the original HELOC set your credit limit at 90% of equity, a 5% decline in value will produce a 50% drop for the purposes of the line.
So if you bought a home in 2001, and got a line in the amount of 90% of your equity in 2005, you might have had 15%-30% equity. Let's say:
2001: buy at $250,000 with a $225,000 mortgage.
2005: valued AVM 2005 at $500,000, $217,000 mortgage = $283,000 equity. Bank granted $200,000 credit line in 2005. Property was leveraged 83.4% and the dollar amount of the difference between available equity and the credit limit was $83,000.
2008: valued AVM $450,000. The difference between the available equity and the credit limit for the purposes of the plan has dropped 10% or $50,000, which is more than 50% of $83,000. The lender can use 226.56(f)(3)(vi)(A)to block any additional draws or reduce the credit limit. In other words, they can revise limits to stick with the original credit terms.
Because AVMs tend to go high when property is rising and low when property is falling, an appraisal may show higher current valuation. But that may not help a consumer in a bubble area, because the original AVM might well have been high. The lender is not required to obtain an appraisal before doing this.
It is not whether you have equity in the property - it is whether you have as much equity as the lender originally demanded.
If the AVM is wrong the lender is still in compliance, and most lenders will not make the mistake of not having their ducks in a row in such actions. But AVMs don't track original property values well.
There was a story about discontinued HELOC's in the April 13 NYTimes.
If DOW goes down to 5,644 in the next 6 months, would that be a significant decline acording to the FED, or it has to be "50% or MORE"?
Mom, please, please e-mail your comment to Sheila Bair.
P.S. Don`t use such large numbers though.
12tht percent
I live in Thousand Oaks, Ca. - Yep, that is right, Countrywide territory.
No, I do not work for Countrywide.
Received a letter from Chase about a month ago stating that our (wife & I) were "cut off" from the HELOC we acquired when we bought our home. They had an AVM (automoated valuation model) pegging our value at approx $540K. Within the last month there have been at least 2 sales in the $700,000's. We had a large (relatively I guess) HELOC for around $200K with a ZERO BALANCE. On the back of the the letter it stated we could appeal with an "Official FNMA Appraisal". I spent $300 (chump change for us) and had one done and sent it to Chase with a very brief letter with NO PERSONAL BULLSHIT stating they were in error and had an erroneous value of our home. For those who give a flying shit we owe around the conforming (NOT AGENCY CONFORMING) limit. I pretty much concluded that we would get some erroneous response like "we at Chase Home Equity could really care less about reality and you guys are pretty muc fucked because of our bad policies over the last 5 years that have screwed us royally. Much to my suprise we got a PHONE CALL within ONE WEEK stating that our line had been reopened. Do we need the money? No, we've got hundreds of thousands in savings. Did this give me satisfaction? Hell no it just leads me to believe the banks our much worse than any reasonable non-armageddon mindset would believe. Yes Virginia, there are many middle of the road people who managed their (wealth?) well thru the years where Joey Bag of Financial Folly was in the process of spending decades of income in less than a year and Banks were actually enabling these financial clowns. Trust me, I know many more like me and if the derelicts hoping for pre 2000 prices get their wish...there is no way on God's Green Earth that those "RENTERS" will have the savings or ability to purchase anything buy a binky for their toothless child.
Cheers,
Mad Max
Mad Max - a demonstration of my point, and if you ask, you may be able to get a refund of the appraisal fee. Try it and see what happens.
Contact them and tell them that you have thought it over and believe that it was their error, and that it was not a reasonable error, and that you believe that they should reimburse you for the appraisal. If they say no tell them you will complain in writing and that you may contact their regulatory agency. Then ask them which agency is their regulator. I bet you get your money back.
MaxedOutMama - excellent info and, sigh, oh so true. San Diego bubble owner here and by tale is just as you say, originally high AVM, bubble burst neighborhood, TILA, chapter z well documented in WaMu HELOC contract. Tried the reappraisal route to challenge - WaMu will only accept appraisals from their chosen service provider (LSI) - new assessment came in at exactly at WaMu revised estimate.
Sinomania,
If I were you, I would get a couple of appraisals from licensed appraisers, and then wrote a complain. Ask who their regulators are, and send a copy there as well. WaMu should have thought before, and they deserve a kick in their balls.