It actually appears - on the surface anyway - that the people themselves are smarter than their alleged leaders and certain morons in the economics profession.
It actually looks like they understand that one can't use debt to spend one's self out of debt.
-many people have no remaining equity in their homes above the 20% conforming threshold.
-Some large part of this is simply that there are few to no lenders willing to make 2nd lien or equity extraction loans. Most of these are non-conforming so there's no place to put them but on your balance sheet.
Between tightening of HELOC requirements, and falling property values erasing a lot of home equity (I have a shocking number of otherwise well-off friends in upside-down mortgages right now), it's not that consumers aren't seeking loans (because lots of people are carrying revolving, unsecured debt, mostly on credit cards), it's that banks simply aren't lending.
I took out a HELOC a few months back when things were looking bad just in case I had troubles with my employment.
When the company adjusted my rate to nearly 9% which is actually lower than 3 of my credit cards, I figured it probably wouldn't ever get used. And I've got a great FICO. I'm sure others have had their rates adjusted just as high if not higher. I informed the bank the high rate, higher than a credit card I have with the same back would make it unlikely I'll ever use the line, and they just said that was their policy.
Of course, I probably won't ever use the line anyway...
I'm uncertain of the relevance or why this is a "sign of the times". The trend started in Q1 of 2006 and hit zero (or very near zero) during Q2 of 2008, before all the shit with LEH, FRE, and FNM and the liquidity and credit crises hit the fan.
I've never really understood home equity loans. From the homeowner's perspective, what sense does it make to borrow money against equity that you've already earned, thus reducing your equity? I guess it might be OK for a home improvement project or for tuition (if the rate is lower than a student loan), and obviously if you have an emergency of some kind, but other than that, it seems self-defeating. And there's no doubt that, at least in the area I'm in, many people were using the money for luxury spending.
The idea behind a HEL is that because it's a secured loan, it's generally a lower interest rate than an unsecured loan like a credit card or personal loan. If you really NEED to borrow money and have the equity, it will save you money.
Of course, lots of people used it irresponsibly, figuring that home values would continue to climb at double-digit rates and it wouldn't matter.
Heh, my bank just sent me a letter saying they were turning off my HELoC. I've got a very high credit rating and a perfect record of payments but because the appraised value of the home has dipped a bit (but far less than many, I'm in a region somewhat spared the real estate crash) they don't want me drawing on it any longer.
Amazing. Simply amazing.
It actually appears - on the surface anyway - that the people themselves are smarter than their alleged leaders and certain morons in the economics profession.
It actually looks like they understand that one can't use debt to spend one's self out of debt.
Of course, looks can be deceiving.
You cannot withdraw what you don't have.
-many people have no remaining equity in their homes above the 20% conforming threshold.
-Some large part of this is simply that there are few to no lenders willing to make 2nd lien or equity extraction loans. Most of these are non-conforming so there's no place to put them but on your balance sheet.
-and, of course, consumers are re-saving.
Anyone for some 'paradox of thrift'?
Between tightening of HELOC requirements, and falling property values erasing a lot of home equity (I have a shocking number of otherwise well-off friends in upside-down mortgages right now), it's not that consumers aren't seeking loans (because lots of people are carrying revolving, unsecured debt, mostly on credit cards), it's that banks simply aren't lending.
I took out a HELOC a few months back when things were looking bad just in case I had troubles with my employment.
When the company adjusted my rate to nearly 9% which is actually lower than 3 of my credit cards, I figured it probably wouldn't ever get used. And I've got a great FICO. I'm sure others have had their rates adjusted just as high if not higher. I informed the bank the high rate, higher than a credit card I have with the same back would make it unlikely I'll ever use the line, and they just said that was their policy.
Of course, I probably won't ever use the line anyway...
I'm uncertain of the relevance or why this is a "sign of the times". The trend started in Q1 of 2006 and hit zero (or very near zero) during Q2 of 2008, before all the shit with LEH, FRE, and FNM and the liquidity and credit crises hit the fan.
I've never really understood home equity loans. From the homeowner's perspective, what sense does it make to borrow money against equity that you've already earned, thus reducing your equity? I guess it might be OK for a home improvement project or for tuition (if the rate is lower than a student loan), and obviously if you have an emergency of some kind, but other than that, it seems self-defeating. And there's no doubt that, at least in the area I'm in, many people were using the money for luxury spending.
Am I missing something here?
"Am I missing something here?"
No, I also wondered what people spent this stuff on. Worthless consumption? Investments (what a double whammy)? Rental properties?
@claudius
The idea behind a HEL is that because it's a secured loan, it's generally a lower interest rate than an unsecured loan like a credit card or personal loan. If you really NEED to borrow money and have the equity, it will save you money.
Of course, lots of people used it irresponsibly, figuring that home values would continue to climb at double-digit rates and it wouldn't matter.
That CR piece is dated Oct 6, 2008.
Some updated figures would be interesting.
Heh, my bank just sent me a letter saying they were turning off my HELoC. I've got a very high credit rating and a perfect record of payments but because the appraised value of the home has dipped a bit (but far less than many, I'm in a region somewhat spared the real estate crash) they don't want me drawing on it any longer.
Maybe that's why folks aren't spending! =)
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