Wells Fargo temporarily suspending applications for home-equity lines of credit
wellsfargo.com
wellsfargo.com
Remember that Wells Fargo is the 26th largest corporation in the world. They have plenty of money. They have lots of smart people (insert your "stupid banker" joke here) working for them. They have lots of highly-paid analysts that make these decisions. These are not spur-of-the-moment, panic-induced decisions. Wells Fargo also has a lot of experience with home values and mortgages, by being the largest Home Mortgage provider in the US (by dollar value), with $126B in home loans [1].
Long story short, they are experienced in home values and mortgages and they have a lot riding on them. They have smart people that have looked at the current and future state of home values and decided, that despite the potential revenue that could be generated from Home Equity Lines, there is too much risk in offering this product and they will stop offering it until further notice.
That's a big deal. Wells Fargo is leaving lots of money on the table by NOT offering these. But their analysts have decided that it is too risky. That to me, means that there is a lot of concern over future home value. We have been living in a housing bubble for a while. We all know it, Wells Fargo knew it, and this could be a signal that at least Wells Fargo is concerned that the bubble might be popping.
(I personally hate Wells Fargo, but did have a Home Mortgage through them until about 3 months ago when I sold my last home. I wouldn't borrow from them again however. This isn't a fanboy piece, but it is important to acknowledge their strengths when looking at signals like this).
[1] - https://www.housingwire.com/articles/41539-here-are-the-top-...
We may absolutely be in for a housing market correction because of COVID's impact on consumer cash flow and its impact on the housing market.
Maybe you're just referring to the last handful of months? In that case, I think it's sort of nuanced (we didn't know exactly how long shutdowns would be needed or how significant the impact would be in early February, certainly) but maybe reasonable.
I don't believe this supports the idea that there was a bubble prior to COVID (say, February or March 2020 for the US).
I think there is a lot of speculation about the Bay Area and SF being in a bubble due to high prices. The demand is still there though and it’s actually grown quite a bit in recent weeks ( SF specifically ).
Cities with a lot of service and factory workers will see a larger correction.
If lots of people were buying 1BR condos because they saw a profit opportunity arbitraging the difference in rent vs. mortgage payments, then a small drop in rents might mean that a large number of people can't make their mortgage payments. That's a big problem, because it implies a foreclosure wave that'll put further downward pressure on prices.
Luckily, or not depending on how you look at it, SF properties and rents tend to be fairly predictable as compared to other markets in large part due to the artificial supply constraints imposed by city council, and the huge demand of the tech industry which tends to weather downturns pretty well. If you can afford $4500/month in rent for a 1 bedroom, chances are you're not going to be fired first.
A similar unit is on HotPads renting for $4500/month (https://hotpads.com/855-folsom-street-san-francisco-ca-94107...).
So with 20% down, 30 Year Fixed, 3.905% Interest, you're paying $3353 in mortgage, $903 in taxes, $605 in HOA and $163 in homeowners insurance. Set aside 1%/year for damages and repairs - $74/mth. (total $5100).
66% of your mortgage in the first year and all those fees are tax deductible, so you can deduct a total of $3900/month. [2] Depending on your tax bracket you can expect to get back $1500.
So your total expenses ($5100) minus tax deductions ($1500) is $3600/month, and it's renting for $4500. You could realize $900 free cash flow, assuming you're a well paid tech worker. Not to mention you'd have your renter building equity in your unit for you -- another $1106/month. Depending on how you account for that, your monthly realized profit could be about $2000.
NOTE: That's after-tax cash flow, which is the model I went with when I was running numbers on my own unit, and it depends on your tax bracket. I picked pretty generous numbers so YMMV.
[1] https://en.wikipedia.org/wiki/Stanley_Saitowitz
[2] https://www.irs.gov/businesses/small-businesses-self-employe...
[*] I doubt that you can rent such a unit at 4,500. Its well above market, so it either has high rotation or high closing costs. Also really hope the US cleans up their act with their tax policies on housing.
Remember 20%-down mortgages are 5X leveraged investments in real-estate so even a 1% appreciation in the underlying works out to a ~5% ROI. To the extent they break even on rental I could easily see why they'd rather take the appreciation.
OpenDoor would have a heck of a time in SF, buying units sight-unseen. On the one hand it would be lower risk thank Phoenix, but it would tie up an ungodly amount of capital.
Re [*]: Totally. $4,500 is a lot, no question, though in it's favor units at 855 come with deeded parking -- in the building, which is ~$300/month in extra value for downtown condos. They're also new, super-modern lofts, and quite large, and SOMA lofts are very reasonable on a $/sqft level. 10 minutes walk to the IG and FB buildings too. I think factoring in all the +'s it's not uncompetitive with similar units nearby without parking in the low 4000's range.
Home value increases have not been particularly steady. And to the extent there is a sustained effect, it is in part due to long-standing government priority of individual home ownership, implemented in a policy of subsidizing home ownership, and in part due to concentration of jobs and people in cities as part of a labor shift.
Edit: almost_unusual makes a good remark that some locales are probably in bubbles and others not; it's something specific to any given region rather than some sweeping statement about the national market.
"AirBNB or something like it will exist in 2 years."
"Monetary policy will not begin to dry up the glut of cash which has objectively ballooned asset prices since 2008."
"Covid will not permanently change certain habits which would otherwise cause a devaluation of property in major cities."
"Some major economic entity will not collapse in the next 2 years."
>it is in part due to long-standing government priority of individual home ownership
This strikes me as a commonly-bandied, well-debunked talking point.
> [remarks on US promotion of homeownership] strikes me as a commonly-bandied, well-debunked talking point.
Please provide a "debunking" of the idea that the US government does not explicitly prioritize, as a matter of policy, and subsidize, home ownership. Here are some facts that run counter to that idea:
1. The US literally has a "National Home Ownership Month" (it's June).
2. The mission statement of HUD's Office of Housing includes "Maintain and expand homeownership."
3. FHA loans.
4. Mortgage interest deduction on primary residences.
5. Capital gains exemption on (a large portion of) primary residence sales.
>Here are some facts that run counter to that idea:
Well, first, I'd like to see facts that actually run counter to that idea. What you've shown is that the government supports and promotes home-ownership for a portion of the population. They don't prove that the government prioritizes home ownership over other policy that could be contributing to asset value increases - say, signals to our national bank to manipulate the money supply. One way to check would be to compare the amount of funding vested in pro-home ownership policy to the amount related to the aforementioned.
Suffice it to say, I'd love the government to invest in the average American to the degree that they've invested in the people who can most directly access the benefits of liberal monetary policy.
The big advancements in tech happened in the mid-20th century with suburban developments that made construction into something of a factory, on site.
In recent years, there have been a few startups trying to make a factories for multi family housing. The idea is to construct modules in a remote factory where you can drive economies of scale, and workers have consistent schedules with steady employment. Then ship modules to the site and stack the blocks in a tiny amount of time to minimize disruption.
Traditional construction management is some absolutely hellish logistics, involving all sorts of waiting for just the right contractor, and everybody carrying risk in weird ways. It's amazing that anything even gets built.
And then the planning stage is even more hellish, especially in places with high cost of construction like California. Only single-family-home builds have any sort of guarantee that if you meet code and zoning, you will be allowed to build. For any thing that is more affordable, like townhomes or apartments, the political process takes priority over the planning department. California cities are also completely cash strapped because of insane unfair property tax breaks for old wealth, meaning that impact and permit fees can easily eat of 10%-25% of the entire project cost. And that's after huge expense of re-planning many times according to community and politician whim, and it only takes a tiny number of housing opponents to force builders into a game of multi-year delays to try to stop all development, by running out the clock on financing that was secured to begin the whole process.
All this is to say is that our housing problems are, at the moment, a political problem much akin the US's healthcare problems. Intractable conflicts between entrenched interests prevent common sense wins for everybody. Technology can seem like a solution (e.g. EHRs) but seldom have any impact, either positive or negative.
While that's one possible reason for this decision, there are other possible reasons. For example, they may not know how future "payment suspensions" will be handled (https://update.wf.com/coronavirus/home-lending/), may not like it (particularly with HELOCs that they keep on their books, unlike most mortgages), and/or may not want the reputation damage or headache of foreclosing on collateral (even if it would cover the debt). Any of those could completely explain this.
This is so comically untrue. Giant companies with forcefields of cash, lobbyists and corporate analysts make stupid panic-based decisions all the time. There are chaotic political battles, unilateral decisions made because one executive had a pouty fit over what another executive did, huge layoffs, price changes, project shutdowns, all based on emotions, political favors, vendettas, etc.
It’s the rule. The clean, well-supported decision that came from analysts with statistical rigor is the exception by far. The larger and more bureaucratic the company, the more extremely tilted towards politics it becomes.
These decisions are rarely punished by the market due to regulatory capture, bailouts, outright fraud, etc. which essentially occur continually for most large companies with no meaningful consequences, even when these acts are completely overt and public.
Under basically no point does Wells Fargo want to foreclose on a house. They will get pennies on the dollar for it independent of macro price differences.
So in analyzing risks a 10% increase in foreclosures is going to weigh dramatically more than a 10% decrease in home values.
First lien mortgages get the house. Second lien gets whatever's left over, and guaranteed that the process is painful.
Chase did the same thing a while back, for the same reasons.
Italy suspended mortgage payments during their lockdown and (correctly, IMO) forced banks to bear some of the financial burden of the economy grinding to a halt. It’s certainly less likely for the US to pass a similar measure but it’s entirely possible that banks could be required to do significantly more “rehabilitation” on defaulted home loans than they have in the past. That’s an expensive undertaking for a bank even in the best of economic times.
One is incomes. It’s quite plausible that defaults in a year or three will turn out to be extremely uncorrelated with today’s credit scores.
The second one is interest rates, which are spectacularly low.
Those two things combined make it very hard to predict how much profit a line of credit type product will be able to produce.
I remembered this: https://www.theguardian.com/business/us-money-blog/2016/oct/...
"disclosed that it would fork over $185m in penalties to regulators after an audit discovered that employees opened as many as 2m deposit and credit accounts in customers’ names but without their consent"
But do agree, however much of the market is driven by such actions and if they are right or wrong, their move will make it more inclined to happen than had they made no such move. Which is an aspect that plays out in many financial markets in various forms.
I'm not convinced that their strategy is necessarily sound and unbiased or representative of the knowledge base they command.
EDIT: My apologies, I was mistaken. They settled for $175 million. You can remove your downvotes now.
https://www.startribune.com/wells-fargo-pays-175-million-in-...
https://consumerist.com/5283290/affidavits-on-how-wells-farg...
WF may be seeing tons of applications for home equity lines in order to backstop failing households. If they're not sure that they'll get paid back, then WF won't want to make the loan.
I once was involved with corporate loan negotiations where the lender could have easily taken the borrower up on a proffered deal, but the fate of the borrower's company would have been sealed on the day the loan was signed. The terms were such that the borrower's odds of being able to repay the loan were <10% and the collateral requirements were at least twice the loan amount. The lender would have roughly doubled their money at the expense of a headache, but chose to walk away instead. The borrower would have taken the deal at almost any price. In the lender's words, "We're in the loan business, we want to make loans where people can pay interest."
My thank-you letter to the lender for walking away was one of the first they'd ever received.
1) The loan officers were good people, with the borrowers' best interest in mind.
2) The headache would have been substantial.
3) They really are in the loan business, not the foreclosure business.
The loan officers were trying hard to understand how the proffered deal wouldn't kill the borrower's company.
If I ever need a loan that falls into their scope, I'm calling them first.
- First is the moral/ethical reason - it doesn't matter your religion or lack thereof, causing someone to crash and burn, causing unemployment, and generally ruining lives is bad.
- Second is their business. Banks are in the lending business. Unless the collateral was cash or stocks (unlikely based on explanation), they'd have to figure out how to repossess and then dispose of the assets. Yes, they probably have a group that handles that sort of thing but you're introducing unnecessary headaches.
Either way, walking away sounds like the right and good call.
The core of it is how commercial real estate is financed; it’s financed on a rolling basis rather than a 1 time mortgage, like a home. This means that rather than revenue most commercial real estate owners are more concerned about what their next financing round will look like. For reasons I cannot explain, bankers care less about the rent a building does receive than they care about the rent it could receive. This incentivizes building owners to leave units empty rather than lower rates, as it actually ends up significantly cheaper for them in the long run.
Bet you didn't know this, but there is a company (an REIT actually) that is publicly traded on the stock market, that specializes in loans to nonprofit religious organizations..."American Church Mortgage Company". Currently appear to be paying a sizable dividend.
"The outbreak of the novel coronavirus (COVID-19) has adversely affected many industries in general and resulted in orders preventing congregation which impacts the ability of churches and other non-profit religious organizations normal methods of worship...To the extent that churches and other non-profit organizations operations in the U.S. are materially and adversely affected by the coronavirus, business and financial results of this industry, and thus our business and financial results, could be materially and adversely impacted."
...and yes, they do foreclose on churches:
"As of December 31, 2019, we had ten first mortgage loans totaling approximately $4,074,000 that are three or more monthly payments in arrears. We may incur a loss if these borrowers are unable to bring their payments current and we are compelled to foreclose on their properties. We may be unable to dispose of the foreclosed properties on terms that enable us to recoup our expenses and outstanding balances.
As of December 31, 2019, we held title to one property located in Bethel, Ohio through a 2018 foreclosure process with an outstanding balance of $114,632"
"The business of making loans to churches and other non-profit religious organizations is highly competitive. We compete with a wide variety of investors and other lenders, including banks, insurance companies, pension funds and fraternal organizations which may have investment objectives similar to our own. A number of these competitors have greater financial resources, larger staffs and longer operating histories than we do. We compete principally by limiting our business "niche" to lending to churches and other non-profit religious organizations, offering loans with competitive and flexible terms, and emphasizing our expertise in the specialized industry segment of lending to churches and other religious organizations. Our competitive “specialty” is in offering fixed-rate, long-term loans, which few of our competitors make available to churches."
As a large mortgage provider, home prices are the best tool that WF has to hedge against large changes in labor value.
I really doubt that. Home values are high in urban areas because of high demand and low supply. The buyers are actually qualified and can afford to pay their mortgages. Mortgages are not being handed out like candy like they were in 2008.
Right now the situation is kind of the inverse of 2008. In 2008, a recession triggered mass job loss. Today, mass job loss resulting from the virus lockdowns has triggered a recession. No bubble burst.
I would bet Wells Fargo is more worried about people who are otherwise creditworthy suddenly being unable to make payments because they lost their jobs, or the government suspending payments. In a situation like this, credit history is not very useful in evaluating risk.
While what triggered this is different, because one has a direct impact on the other the OP is still right about the housing bubble IMO.
Trigger (virus) --> mass job layoff in directly affected industries (e.g. travel) --> recession --> more job losses in second order affected industries (e.g. advertising, food supply) etc. ... --> ultimately impacting asset prices like houses which grew too much too fast
May I mention how absolutely insane is the richest person has more wealth than that?
I think there's some ambiguity in the idea that something people repeat is actually a "widely held viewpoint".
Saying it's bizarre seems to me to be standard shorthand for "if you really think about the implications, which people usually don't".
So-called "ideas" or "viewpoints" are more fit in an evolutionary sense the less people think about them while transmitting them.
Catching up here (original commenter). Your take is spot on as to what I meant. (Probably my fault for being unclear)
If the government is guaranteeing one type of residential real estate loan and not the other it makes no sense for a bank to offer the one that isn’t guaranteed when they can just pursue practically risk free lending.
The only thing that got us through was that we already had an equity line open and once open, it’s just like a low interest credit card. You don’t pay anything for it if it’s not being used but having it available provides a big emergency buffer.
It’s the primary reason I tell everyone to put down 20% on your home because as soon as you do that, you don’t pay PMI and you qualify for HELOC.
Not saying you're wrong, it's just I don't see what kind of dynamics would lead to that kind of thing, where the economic situation drastically changes to the point where they won't make new HE loans but will gladly honor anyone's exercise of an existing HELOC on (mostly) the same terms they had before.
I could understand if HELOC approval locked in some duration under which the bank couldn't back out, but I don't see why banks would grant such optionality either.
The risks for the bank are the same risk with any type of loan. The difference here is that it’s secured against the home. I believe the max limit on it is 80% of the equity that you have in the home. Applying for an increase is the same as applying for an entirely new loan.
Just think about how many things can happen over a 15-30 year mortgage.
People also said the same thing about Washington Mutual. And about Bear Stearns.
I think home values are not the point, and all real estate is local, so there is no national bubble. People just want to babble about bubbles because that's all they learned from 2008 is to repeat the word. Or they live in some crazy place like SF or Vancouver.
When you don't need it, it is real easy to get.
When you need it, it is real hard to get.
This is why $1 in the bank is worth so much more than $1 in credit that you can maybe draw on. Especially lines of credit that can be called in.
Edit: assuming the borrower is current.
Lesson learned: take advantage of cheap credit while you can.
If they're capable of paying back that refinance ... probably could have just saved.
I suppose there is a little window of time where it is advantageous if they're laid off again, that seems more like random chance.
I had some credit cards go from 50k credit line to 5k.
My credit was unchanged. They just didn't want 45k of empty credit on their books.
Do a cash out refi if you need to tap your equity.
Also presumably anyone applying for a HELOC right now is doing so to tide them over, and banks reason that many will just burn through the debt and then default with less equity.
This is happening. The Fed is buying mortgage backed securities.
In other words: the Fed is buying real estate.
These are typically available only centrally.
A counter point to your central schooling argument is Chicago Public Schools, which are terrible.
If you don’t have patience, but also can’t afford private education of some sort and have to resort to broken public institutions, there's not much hope (imho). Patience is cheap (comparatively speaking).
I've learned how to weld, sail, wrench on diesel engines and my Teslas, perform wilderness EMT procedures, woodwork, and build houses/perform large scale home improvement on my own. K-12 is a cake walk. Don't doubt your vibe, you're a fellow human and you can do it too.
Are you concerned about this? Or do you have a way to effectively replace this?
Even in elementary school it’s an important lesson to learn that you’re not a special snowflake and you don’t get all of the attention of superiors (teachers) to yourself.
I think you're overestimating the amount of background knowledge the average tech worker might need to make up to teach elementary and high school subjects from text books.
People TA entire college classes with the same amount (0) of experience.
Did you try reading the text book? It's made for children. It's high school math. I cannot understand this mindset but I fear it is extremely common and our society is in trouble for it.
I do, and you should too. These things are not difficult to learn. Moreover they are good full body workouts and, speaking from experience with my father, can be excellent bonding experiences.
But that's beside the point. You're relying far too much on others if you've lost the ability to spend 5-20 minutes reading one chapter in a children's textbook for a chance to educate and bond with your child.
If you can learn a new programming language or framework without someone holding your hand, you can do this basic stuff. I think people either underestimate themselves or they're willing to go to great lengths to justify their laziness.
I’m sure there are dozens of things we pay for everyday that are not too difficult to learn. In business, you choose between your core competencies and what is best to outsource - your typical build vs buy decisions. Even while developing you choose when to use third party frameworks and what to build yourself.
I’m not in Silicon Valley I am just in big city USA so I am in no way bragging. But by specializing in software development, that affords me the big house in the burbs, that also allows me to pay other people to cut my grass while I exercise in the comfort of my fully equipped home gym in the air conditioning.
* If you can learn a new programming language or framework without someone holding your hand, you can do this basic stuff. I think people either underestimate themselves or they're willing to go to great lengths to justify their laziness.*
I learned it the first time 20+ years ago, I have no doubt that I could relearn it - especially with the help - but everyone chooses how to optimize their time? Is my time spent better learning trig or doing something that can make me more money so I can cash flow his way through college?
We're talking about a pandemic where some degree of homeschooling has become mandatory. I'm just pointing out that the difficulty is minimal when it's a question of educating your kids. Our specializations are irrelevant.
The rest, which is a different subject, just boils down to our difference preferences - I prefer to spend my spare time practicing practical skills and I think society would be far better off if other people did too. Even fixing cars gives your mind a technical workout that translates to other domains.
Or I could spend the time improving in the technical domain directly by bringing my laptop to the service department instead of fixing a car where they have people who can do it faster with better equipment and somehow hope that it will make me a better developer, team lead, overpriced consultant or whatever rabbit I’m chasing at the time.
I’m sure the farmer would also look in disdain because you don’t grow your own food and instead go the grocery store.
That’s not to say the system is great, but there is a lot more nuance than just declaring them “terrible”. Unless me or my spouse is a trained educator, I will trust the experts. Just like I do when I need medical, electrical or plumbing work done.
[1] https://www.usnews.com/education/best-high-schools/illinois
I’m having a coffee watching the sunrise over Appalachia while some poor sap is dragging themselves to the Blue line. I’m not the best teacher, but life is about trade offs.
The way you jump between Cook County and Chicago is also a strange way to measure things. You can live in Cook County and not be in Chicago proper. Cook County has places like Evanston, Hinsdale, Kenilworth, Glenview, and Oak Park with some of the best schools in the country.
I said, "CPS is terrible". You said that grade schools are hit or miss, but 5 of the top high schools in Illinois are in CPS, and that there are always magnet schools that require a lottery. In my mind, if you can't offer consistent quality across your territory (Chicago proper) and grade levels (K-12), you are a subpar institution, ie "terrible". There are pockets of success (the high schools you mention, and the luck of my kids getting into a magnet school) but one should not rely on luck for something as critical as their child's education.
I bring up the dollars involved (cook county, property taxes, Chicago debt) because that is the fuel for the education engine, and that fuel is running out (pension obligations are protected by the Illinois constitution, education is not). Therefore, it is very likely the education experience in Chicago continues to decline. If it's already bad today (which it is objectively is, based on our subthread discussion and how weighted luck is as a component of your child's experience and success), why would one double down on it (accept fate and put your kids into CPS) while also being financially exposed and locked into the structural decline?
Blindly trusting experts is a recipe for disaster. Experts don't always have your individual interests at heart. As an individual, it is your job to optimize for you and your family. I hope this clarifies my admittedly poorly constructed thesis further up the thread. I'm off to make more coffee.
This is the imbedded assumption you are working with. All indications are that the system has significantly improved over the past 10 years [1]. The state also passed a significant education bill that directs more money to the district (not less, as you imply) [2]. It’s well-known that schools are neighborhood-by-neighborhood asset in Chicago. Thats part of the calculus of moving.
Nobody is “blindly trusting” anyone, not sure why you assumed that.
[1] https://www.usnews.com/news/the-report/articles/2018-04-13/t...
[2] https://www.chicagotribune.com/politics/ct-illinois-house-sc...
Your duty as a parent is to educate your children. Why the hell would I trust the government to not indoctrinate my children?
It is truly sad that many parents wash their hands of raising their children by passing them off to the government to be educated.
Do you grow all of the food your child eats? It’s truly sad how many parents wash their hands of raising their children by feeding them something someone else grew or made.
Do you diagnose your children’s illnesses? It’s truly sad how many parents wash their hands of raising their children by passing them off to some stranger to be healed.
Do you teach your children to call the police or fire? It’s truly sad how many parents wash their hands of raising their children by passing them off to police and fire in emergencies.
I did not say this nor did I imply it. Of course there are situations in which the parents are unable to homeschool. This does not make them any worse a parent. Even if you do homeschool, it's not uncommon to take some external classes as you get into the higher grades. I'm also not saying the that the parents need to write the math books they use, nor do they need to grow all food. But they certainly should feed their children with the food bought at the store. School is used to much as a day care and catch all. If it was more of a couple hours hours a week learning only math at school and at home parents actually took the time to teach virtue and discipline it would better.
Another aspect will be the high costs to build the new housing needed to support a trend like this. Those costs might not make non-urban areas much cheaper than using existing housing stock in large cities.
It's hard to say how many people who migrated to truly urban living take this as a sign that they should at least move out to the suburbs (where their job is anyway in many cases).
I do think that, for jobs that can be done remotely, a lot of companies are going to move away from everyone needing to be in the office all the time--though I suspect very few will go entirely remote.
To accommodate new people towns either have to start building more housing (costs increase) or those people will have to move 1 hour and 15 minutes outside the city. Rinse and repeat until the formula doesn’t look as beneficial.
So I'm not really convinced that if some of the people who thought urban living was for them now have second thoughts, there will be a lot of problems accommodating them with housing. And again, a lot of the jobs are out in those suburbs anyway. A lot of the people who moved into cities did so because they wanted to, not because they could walk to their jobs from there.
The economics depend entirely on how many people have these “second thoughts”. If it’s “a lot”, relative to those who live in cities, then it will absolutely lead to housing issues outside of cities. Which will lead to infrastructure issues (schools, water, roads, libraries, community centers, etc.). Which will lead to tax increases to pay for infrastructure. Then the cycle will kick off again.
Furthermore, the (somewhat) shift back into cities is counter the trend in the second half of the 20th century. Is it a real trend or a temporary fashion?
1. your last N years of work/credit history are currently less predictive about future income/repayment ability than banks would like. regardless of who you are.
2. even if the same amount of money continues to chase the housing market, there is (as some other comments mention) at least a little bit of a reason to believe that the money might want to move to different geographic areas. if you don't know what that change will look like, your ability to predict future home values is reduced.
Three years to the day after the last short sale, we bought a brand new build in a much better area of the city with 5% down on a custom build. No bankruptcy required.
As the saying goes: If you owe the bank $100 that's your problem. If you owe the bank $100 million, that's the bank's problem.
If you're ever deep in over your head financially, the smartest thing to do is to walk away. A mere year or two after filing bankruptcy, you can easily repair your credit to the point that you can get a mortgage or auto loan at a reasonable rate. Within seven years, bankruptcy or not, abandoned debt is off your credit history. Why suffer for a decade treading water paying down interest and penalties with no hope of ever getting rid of the principal if you can just hit reset?
I'm not saying it's right to rack up enormous debt on purpose and walk away when you have the means to pay, but people literally kill themselves from stress and suicide when they can just stop paying. If you tried to do the right thing and through no fault of your own (illness, injury, massive global disruption in the economy) you find yourself in an insurmountable position, don't feel bad. Just say no.
Of course they do, you are just a blip on the bank's radar. The decision to foreclose is a matter of business to them. So why can't borrowers do the same thing and essentially "foreclose" on the bank? Foreclosure is literally just cutting your losses. That's what the banks do all the time, so if they can do it, then why can't borrowers do it too? It is an excellent perspective.
https://www.quickenloans.com/learn/the-difference-between-re...
Once they have a better egg they can put back into a property if they wish, hopefully with the help of a smaller loan they can actually pay.
If instead, OC means that they can't keep up with the payments on the home, then that would mean the solution is simply to downsize to something that they can afford. Sell the house, pay off the mortgages, and move into a rental that is within their means.
The only reason that I say that the stock market is a bad idea is that if their parents can't manage the personal finances of a simple mortgage, then making intelligent decisions in the stock market is probably not a good option for them. I am not calling them stupid, but I am just saying that investing in the stock market intelligently is multiple magnitudes more complicated than managing your mortgage. Countless studies have shown that when laymen invest in the stock market, they usually underperform the index funds.
Yes, the stock market is down right now, which is the time to buy. But just throwing money at it, simply because it is down is far from a good decision either. Some stocks right now will likely not recover for a decade or longer and many will file bankruptcy. Some will profit wildly. The stock market is going to be very volatile, which means POTENTIAL for huge gains. But unless you are making these decision with absolute care and awareness to hide possible losses, you are essentially treating it like a lottery.
First, you can always re-finance. And right now is actually a good time to re-finance, because interest rates just dropped. They could get a low APR fixed-rate Mortgage right now if they can re-qualify. The benefit of re-financing is that you could combine your Home Equity Loan (which is usually higher interest than a traditional mortgage) and your outstanding mortgage into one new payment plan. This would be most likely at a much lower combined interest than your parents are seeing right now. Interest rates right now are exceptionally low with the pandemic, so locking in a fixed-rate mortgage at these low APRs will go a long way in helping your parents pay down the balance of the loan faster, while making the exact same payment as they are right now. This is because less of the monthly payment goes towards interest.
Second, make extra payments each month. Even a hundred bucks or so, adds up quickly. For example. Let's say they owe $200,000 on the home on a 3.5% APR loan. They probably make payments in the ballpark of $1,200 a month on that amount.
On these figures, they are paying approximately 0.3% interest each month on the principal ($200,000). That is $600 a month in interest. This could be even higher if you factor in a higher APR from the Home Equity Line of Credit (probably 4.5-5% APR, or 0.4% a month). That means the Home Equity Line might be paying as much as $800 a month in interest. Let's split the difference and say half the home value is under the Home Equity Line and the other half of the value is under the first Mortgage. That's $700 a month that goes towards interest. So of their $1,200 payment each month that leaves their bank account, only $500 actually goes towards their home.
As you can see, if they just wait until next month they will again pay $700 in interest and $500 towards principal (This scale crosses over time as you lower your principal). So if they instead increase their payment just $100 a month, from $1,200 to $1,300 then they still pay the same $700 in interest, but this time $600 will go towards principal. That is a 20% increase in the speed of paying off your home with just an extra $100 a month. That also means that your principal lowers faster, which in turn lowers your interest payments (since they are based off principal) for future month. This creates a positive "Snowball" effect for your parents, quickly accelerating the speed of home ownership with a very small (additional) sacrifice per month.
Under the same example, imagine if they put $200 more per month towards it. This would be paying the house principal off at $700 a month instead of $500 a month, a 40% increase! On a 30 year mortgage, paying an extra $200 a month could mean paying off your home more than A DECADE EARLIER! The effects are incredible.
Now imagine that they DON'T have an extra $100 a month. You can have the same effect by simply refinancing your home and combining both mortgages into a single, low APR mortgage, offered right now with low interest rates of the pandemic. They could secure a 2.6% APR loan combined across both mortgages.
On a 2.6% APR mortgage they would be paying only $433 in interest each month instead of $700 (assuming the same $200,000 outstanding balance figure as before). That is an additional $267 a month that goes towards the home principal each month by making the same $1,200 payment that they were already making before. So instead of $500 a month going to principal, they would be paying $767 per month towards principal. That is a 53% increase in the amount going towards paying off your home! All while making the same payment as they are already making.
Now for the grand finale, imagine that they re-financed AND they added $100 a month to their payment. This would mean they are paying off $867 a month towards their principal, which is 73% increase in their loan payoff. If they were to add $200 a month to their payment AND re-finance, it would be a 94% increase (which is nearly double).
Everyone's situation is unique. But I would highly recommend that you talk to your parents about re-financing. It doesn't always make sense to re-finance, but right now it makes A LOT of sense. Be sure to get a fixed-rate mortgage since rates are so low right now, you want to lock them in. And try to combine both mortgages. The bank will offer a lower combined interest rate and the temptation would be to pay the subsequent lower payment amount that the bank offers. Instead of paying that lower amount, convince your parents to pay the same they are paying now. This will essentially offer that extra payment amount that has such a significant impact on speed of loan pay-off. Any extra they can offer on top (even $50) goes a long way towards accelerating the loan payoff. In fact, you could even offer that they simply follow these tricks for 1 year and it could possibly get them at least out from under their loan in a year. Then they might still owe on it, but could resume a less-aggressive payoff model once they know they have plenty of positive equity on the home. They could settle back on the lower payment offered by the lower interest rate thanks to refinancing.
(hate for the banks aside, i would do the same thing..)
In the extreme, a home buyer borrows a million dollars to buy an expensive house, the economy tanks before the first payment, the borrower walks away, and the bank gets a house worth $400K.
I'm not sure the "right collateral" even exists for home loans, it's a weird case where the "collateral" is the item being purchased on credit instead of something the borrower actually has.
They are basically a flexible cash-out second mortgage.
> In the extreme, a home buyer borrows a million dollars to buy an expensive house, the economy tanks before the first payment, the borrower walks away, and the bank gets a house worth $400K.
You've just described ordinary mortgage risk, in no-recourse states. In recourse states, the bank can go after the borrower for the remaining balance of the loan ($600k). Generally if a bank was willing to lend $1 million to someone, they had reasonably high credit and cash flow at origination time (debt-to-income ratio, non-conventional jumbo loan). They may not get their $600k back, and in no-recourse states they will get $0 back, but that is priced in to the interest rate of the loan.
For a house worth $1MM in February and a first mortgage loan balance of $700K, it sure looks like the borrower has $300K in equity in the house.
If the economy, job market, and housing market evolve such that the house becomes worth $600K a year from now, how much equity does the borrower have at that point?
What I think most likely happened is that banks plugged their (new, very high) risk level into their interest rate formulas, got very high rates (imagine 10-20%) and decided it would be worse, for publicity, revenue, or other reasons, to lend at those rates rather than halt HELOC origination entirely.
Your thinking is circular - the house doesn't truly belong to the borrower exactly because it's the collateral of the loan. Nothing strange about it.
Let me throw this alternative out there. Let's say that you have a million dollar home that is paid in full(no mortgage or any other liens on the property.) You decided that given the uncertainty, you want to make sure you have a years worth of expenses in cash. The lender decides that they will lend you 100k (only 10% of the value of the home) at 2%(well above the fed rate which is near zero) as long as you agree to a lien on the property. Even if the home loses half of its value the lender will still be made whole.
If it wasn't my money and my bonus depended on my loan volume, even if I suspect many will blow up in 5 years? 2008.
A universal basic income would be best, but short of that, more consumer loans would be useful. And better if they only need to be paid back when you're making money.
Edit: Of course, they were dumb for signing up for those loans in the first place. But the brokers who sold people those loans were straight up loan sharks.
Are you saying that a bank should make irresponsible loans for people that make irresponsible decisions?
Look at the last housing crash. The crash was caused by banks offering people loans that they knew would most likely default. They offered people more money than they could afford to pay. If the bank was looking out for your best interest they would have told millions of Americans "no" on their mortgage applications. But the bank knew that they could sell your loan off before you defaulted and make it someone else's problem. It gets more complicated than that obviously, but the crash was caused by the banks knowingly extending bad loans. The banks are looking out for themselves, not you.
> Due to the economic uncertainty created by COVID-19, we’re temporarily not accepting applications for new home equity lines of credit (HELOC). This will protect both you and the bank.
https://www.chase.com/content/chase-ux/en/personal/home-equi...
From Wikipedia:
> A HELOC differs from a conventional home equity loan in that the borrower is not advanced the entire sum up front, but uses a line of credit to borrow sums that total no more than the credit limit, similar to a credit card. HELOC funds can be borrowed during the "draw period" (typically 5 to 25 years). ...
https://en.wikipedia.org/wiki/Home_equity_line_of_credit
This has two main implications:
1. Two major banks are now worried about consumer solvency (and/or real estate prices) to the degree that they're forgoing HELOC origination profits across the board. An alternative response could have been to simply raise interest rates on these loans. The fact that the loans were suspended suggests a lot more afoot than meets the eye. Those suggesting to "cash-out refi instead" may be surprised to find in the coming weeks that these loans have also been terminated, or saddled with terms that make them unattractive.
2. Consumers who were planning to tap home equity to pay for monthly expenses will not be able to do so.
This could spell a lot of trouble moving forward. US consumers view their homes as a kind of ATM, dispensing dollars on demand through HELOCs. That money can be used for literally anything.
Without an easy source of credit to tap, where will the American consumer turn? In increasing order of existential risk:
1. Sale of big-ticket property (houses, boats, cars, cutting short college degrees).
2. Credit cards
3. Payday loans
4. Default on other loans
5. Bankruptcy protection
These options magnify bad decisions made in the past. Selling big-ticket items drives down the market price of the underlying assets, which leads to more distress, and so on.
Credit cards and payday loans charge indefensibly-high interest rates that can easily lead consumers further down the ladder of insolvency.
Bankruptcy filings destroy money by wiping loans off the balance sheets of banks. Banks respond by tightening lending standards, which drives the cycle further down.
How will employers likely respond?
1. Hiring freezes
2. Pay cuts (nominal or real, through increased employee contributions to health care plans)
3. Bankruptcy
All of these things, from stress on consumers to pressure on businesses, are deflationary. Expect the value of cash to increase compared to the value of stuff.
How to approach what lies ahead? If you're in debt, get out now. Then stay out. Deflation wipes out debtors as they're forced to pay back loans with ever-appreciating dollars.
Banks are not fools, however, and they understand that there is more to consumer credit risk than FICO scores, especially in this kind of turmoil and economic contraction.