Holders of HELOCs and second mortgages are going to lose a great deal of money. So far, few of these losses have been recognized, and lenders are in no hurry to do so.
Irvine Home Address … 41 MOJAVE Irvine, CA 92602
Resale Home Price …… $900,000
This bloody road remains a mystery
This sudden darkness fills the air
What are we waiting for?
Won't anybody help us?
What are we waiting for?
We can't afford to be innocent
Stand up and face the enemy
It's a do or die situation
We will be Invincible
This shattered dream you cannot justify
We're gonna scream until we're satisified
What are we running for?
We've got the right to be angry
What are we running for?
When there's no where we can run to anymore
Pat Benetar — Invincible
None of us knows how the housing bust will play out. Some contend it already has, but those living in the reality-based community know we have a tremendous problem with delinquencies lenders are unable to resolve. What are we waiting for? Lenders to take losses.
The delinquency problem will be resolved through a combination of loan modifications, short sales and foreclosures. Those are the only three viable options. Loan modifications are proving to fail, so that leaves short sales and foreclosures. Either solution will push prices lower.
Short sale approval takes many months, and many times, no approval is given. Lenders fail to foreclose on houses even when the borrowers quit paying and make no effort to work out a deal. These strange lender behaviors are caused by the same root problem: pending losses exceed the value of capital in our banking system.
When short sales are not approved, and when squatters are allowed to stay in property without paying, resale transactions do not occur that would ordinarily would be happening. Therefore, sales volumes are well below normal.
Our local inventory is still very low relative to historic norms.
Prices are only sustained by very low inventories which are a result of lenders refusing to foreclose. The inventory we do have looks more abundant than it really is because a significant portion of that inventory is short sales that have been sitting on the market for months with 20 waiting offers.
Lenders are not going to let borrowers squat until prices come back. Why would they? If they are not going to get any wage income from the borrower, it makes more sense financially to boot them out, rent the property to a paying tenant and wait for appreciation to bail them out. They are going to receive the benefit of appreciation either way, so they might as well get some income from the occupant.
Once lenders can absorb the losses on their financial statements, they will begin to push squatters out. The only question is when this will happen. Since Bank of America to Increase Foreclosure Rate by 600% in 2010 and The Debt Star Has Cleared the Planet, it looks as if now is the time. Or perhaps it is more accurate to say that now is the beginning of a process that will go on until the excess debt is cleared from the system.
Second Lien Position is a total loss
Lenders are concerned about losses on their first mortgage portfolios, but the array of market props has likely provided a stable floor in many markets (not ours) that should limit losses. However, second mortgages — and that includes HELOCs — only recoup their capital after the first mortgage is paid in full. If the first mortgage takes any loss at all, the second mortgage is completely wiped out.
When you look at a lender's balance sheet, they show loans as an asset. The value of that asset is based on the likelihood of repayment and the claim to underlying capital in foreclosure. In the case of second mortgages and HELOCs, the likelihood of repayment is very low, and the value of the claim to underlying collateral is less than zero. In short, holders of second lien mortgages are screwed.
Refusal of holders of second lien mortgages to recognize their losses is the primary barrier to market clearing through increased short-sale volume.
Look at a short sale transaction from the perspective of a second lien holder: If the house sells, the second lien is wiped out, so the asset is worth nothing. If the second lien holder blocks the sale, there is a chance, either someone will pay them something to go away, or appreciation will bail them out. They have no incentive to consummate a transaction today that wipes them out, and they have every incentive to block the sale until a better day. The only power they have in the negotiation is the power of no, and since they have everything to lose and nothing to gain, they say no most of the time.
HAFA is designed to give something to second lien holders to get them to participate in the short sale process. If lenders take the government payoff through HAFA, short sales will occur in large numbers. If lenders do not take the deal, foreclosures will clear out the rest. Since the short sale nets something whereas the foreclosure nets nothing, lenders are strongly encouraged to take what they can get.
By Charles Feldman Apr 13th 2010
Say it ain't so. If a prediction from a leading research firm turns out to be accurate, three of the country's biggest banks are poised for colossal losses of up to $30 billion — this time because of their exposure to home-equity loans.
The research firm, CreditSights Inc., says that Bank of America, Wells Fargo and JPMorgan Chase — the three biggest U.S. consumer banks — are particularly vulnerable to "changes in the consumer cycle," reports Britain's Telegraph. And HELOCs, as the home-equity loans are known, are shaping up to be the next problem area in housing.
HELOCs and seconds are just now surfacing as problems because lenders have ignored the truth of these loans with a few years of mark-to-fantasy accounting. The problem was always there. Its shape was formed years ago. Now is the first time the media has paid any attention to it, so more bank write downs from HELOCs and seconds is merely the next of the many housing market problems the media is finally making the weary masses aware of.
Irresponsible lending caused this problem.
In the last quarter of 2009, late payments on home-equity loans hit record highs, according to the American Bankers Association. The loans, typically taken out on top of a primary mortgage, are a source of dispute among lenders and those who advocate reducing mortgage principal to stem foreclosures — and the subject of a Congressional hearing being held today. Second loan holders are forced to take a loss when the first mortgage loan is modified, which they are loathe to do.
JPMorgan Chase CEO Jamie Dimon, says Bloomberg, told investors in the bank's annual report in February that quarterly writedowns in home-equity lending "could reach $1.4 billion" this year. But CreditSights believes the HELOC problem could be so bad that the three banks could see their 2010 profits — estimated at $30 billion — completely wiped out, the Telegraph reported.
Do you see the game the Federal Reserve is playing? By giving banks money at 0% and allowing them to earn 5%, the Federal Reserve allows them to make billions of extra dollars. Unfortunately, they lost so much money from their bubble foolishness, that an entire years earnings will only cover their losses on HELOCs and seconds (if the estimates are correct). What about their derivative losses? What about the commercial real estate losses they have not written down yet? Despite the common belief that inflation will come, the deflationary winds are still blowing hurricane force.
CreditSights, by the way, reputedly predicted the housing downturn back in 2006, so people are taking notice of its latest warning.
In an interview with Bloomberg, CreditSights' senior bank analyst Baylor Lancaster said: "While a lot of people are looking for dramatic improvement in the short term, one area that still has to be worked through in a material way is home equity." The writedowns from HELOCs are not likely to show up in earnings reports until later this year, Lancaster said.
Together with Citigroup the banks hold about 42 percent of the $1.1 trillion in second-home liens. Unlike first mortgages, they are typically not bundled and sold off to investors but kept on the banks' books. The biggest home-equity lender in the U.S. is Bank of America, holding some $138 billion in such loans. Wells Fargo has about $123.8 billion of home-equity loans.
Charles Feldman is a journalist, media consultant and co-author of the book, "No Time To Think-The Menace of Media Speed and the 24-hour New Cycle." He has written about real estate related issues for several years.
The endless array of failed bailouts and the neverending mortgage crisis occurs to disguise the insolvency of our banks. Lenders have not taken the write downs on what will likely be huge losses on all these loans. I have profile massive losses day after day just here in Irvine. The HELOCs and second mortgages are almost always a total loss, and our market hasn't fallen as much as others.
The dance between lenders and borrowers has gone on for so long because lenders had few viable options in 2008 and 2009. If they would have processed their foreclosures in a timely manner, their losses would have been staggering, bank insolvency would have been exposed, and we would have been forced to nationalize the banking system. By pretending for a couple of years, they made enough money to expose their dirty laundry, take their necessary write downs, and keep their jobs and their bonuses.
Punished for restraint
- This property was purchased on 4/21/2004 for $1,175,000. The owners used a $881,250 first mortgage and a $293,750 down payment.
- On 12/28/2004 they obtained an $82,200 HELOC.
- On 3/27/2006 they refinanced the first mortgage with a $915,000 Option ARM.
- On 4/13/2006 they obtained a $200,000 HELOC.
- Total property debt is $1,115,000.
- Total mortgage equity withdrawal is $233,750.
Today's HELOC abusers are not as bad as most. I give them a D. They put a sizable amount down, but they steadily withdrew it and added to their mortgage balance. They didn't take out more than they paid, so they didn't get back all of their down payment. They probably wish they had because now they are losing their house, their credit is trashed, and their down payment is lost. I hope the down payment money wasn't a gift from parents or something like that. The parents would be pissed.
If this family had been more foolish, they probably could have taken several hundred thousand more than they paid out of the property. They received no reward for prudence. What are they going to do next time?
Irvine Home Address … 41 MOJAVE Irvine, CA 92602
Resale Home Price … $900,000
Home Purchase Price … $1,175,000
Home Purchase Date …. 4/21/2004
Net Gain (Loss) ………. $(329,000)
Percent Change ………. -23.4%
Annual Appreciation … -4.3%
Cost of Ownership
$900,000 ………. Asking Price
$180,000 ………. 20% Down Conventional
5.24% …………… Mortgage Interest Rate
$720,000 ………. 30-Year Mortgage
$191,479 ………. Income Requirement
$3,971 ………. Monthly Mortgage Payment
$780 ………. Property Tax
$333 ………. Special Taxes and Levies (Mello Roos)
$75 ………. Homeowners Insurance
$90 ………. Homeowners Association Fees
$5,250 ………. Monthly Cash Outlays
-$981 ………. Tax Savings (% of Interest and Property Tax)
-$827 ………. Equity Hidden in Payment
$374 ………. Lost Income to Down Payment (net of taxes)
$113 ………. Maintenance and Replacement Reserves
$3,928 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$9,000 ………. Furnishing and Move In @1%
$9,000 ………. Closing Costs @1%
$7,200 ………… Interest Points @1% of Loan
$180,000 ………. Down Payment
$205,200 ………. Total Cash Costs
$60,200 ………… Emergency Cash Reserves
$265,400 ………. Total Savings Needed
Beds: : 4
Sq. Ft.: : 3456
Lot Size: : 5,775 Sq. Ft.
Property Type:: Residential, Single Family
Style:: Two Level, Other
Community: : Northpark
County: : Orange
MLS#: : P717754
Source: : SoCalMLS
Beautiful home in Northpark, totally remodeled.