Animated photo in wordpress.com link (trust me, it’s worth it)
Lead Story… A massive number of Home Equity Lines of Credit (also known as HELOCs) were originated from 2005-2007, many of which have not been refinanced due to a combination of increased underwriting scrutiny and falling values (depending, of course on where the home is located). Nearly all of these loans were revolving lines with adjustable rates that are interest only for the first 10 years. Now those loans are beginning to convert to amortizing which is leading to an increase in missed payments and a whole bunch of headachese. From the WSJ:
The bill is coming due for many homeowners on a type of loan that was widely popular in the run-up to the housing bust, causing a rise in delinquencies at banks.
More homeowners are missing payments on their home-equity lines of credit, or HELOCs, a type of loan that allows borrowers to withdraw cash from their house to pay for renovations, college tuition or almost any other expense. These loans typically require interest-only payments for the first 10 years, but then principal payments kick in for the next 15 or 20 years.
The increased cost of the loan can become a strain for some borrowers. This is becoming an issue now because many borrowers signed up for Helocs in the run-up to the housing bust as home values kept rising. Roughly 840,000 Helocs taken out in 2006 are resetting this year, with principal payments on an additional nearly one million loans expected to hit in 2017.
Borrowers who signed up for Helocs in early 2006 were at least 30 days late on $2.8 billion of balances four months after principal payments kicked in this year, according to Equifax. That represents 4.4% of the balances on outstanding 2006 Helocs. Delinquencies were at 2.9% before the reset.
Resets can lead to payments jumping by hundreds, or in some cases, thousands of dollars a month. Consider a Heloc with a $100,000 balance and a 4.5% interest rate. It would have a $375 interest-only monthly payment, which would then rise to about $633 when principal payments kick in, assuming a 20-year repayment period, according to mortgage-data firm HSH.com.
Consider this part of the lasting hangover from the Great Housing Crisis. Banks, the government and borrowers spent a lot of effort in working through issues arising in the massive primary mortgage market both during and after the Great Recession but spent almost no time on HELOC’s. This made sense as the primary market is far larger than the HELOC market and represented a much larger systemic risk. Also, as stated earlier, almost all HELOC’s are adjustable meaning that borrowers generally benefited from falling interest rates over the past 10 years or so even if the loans couldn’t refinance. Many borrowers who thought that they were mostly out of the woods are now getting blindsided by letters from their HELOC lender informing them that the payment is about to increase because it’s about to start amortizing. Those with significant equity (mostly in the expensive coastal markets that have recovered the most) will probably refinance. Those who don’t have significant equity are either going to have to absorb the higher payment, sell or try to work out a deal with their lender (who probably doesn’t want to foreclose and assume responsibility for the 1st DOT being that there is little to no equity and the HELOC itself might be underwater). This is probably not a catastrophe in the making since it’s nowhere near the size of the primary mortgage market and inventory is generally tight to begin with. However, it is another headwind in a housing market (and an economy for that matter) that is finally showing tepid signs of a real recovery.
New Normal: Federal Reserve officials are begrudgingly coming to the conclusion that they have long feared – the unconventional tools that they have had to use during and after the Great Recession are likely to be needed for a long time.
About Time: Middle-income jobs are finally showing signs of a rebound.
Resilient: A handfull of shale drillers are ramping up drilling in the oil patch again as prices close in on $50/barrel.
The Beneficiaries of Hoarding: Self storage has been white hot and could be for some time, benefiting from declining home ownership, new management systems and better technology. (h/t Scott Ramser)
On the Move: The non-NIMBY argument for restrictive zoning in big coastal cities. Not sure how this plays out in the real world but it’s sort of fascinating. See Also: Bay Area startups find low cost outposts in Arizona.
Expensive Affordability: For the first time ever, Seattle is mandating that apartment and condo developers include affordable units in their projects or pay an in-lieu fee to develop affordable units elsewhere after a unanamous City Council vote. (h/t Scott Cameron)
Dual Threat: Say what you will about Kobe Bryant’s final few crappy seasons with the Lakers but the guy seems to have an eye for good VC investments.
Swipe Right: Single people are starting to use Linked as a dating site.
Maverick: The story of how Mark Cuban went from a broke 20-something nicknamed “Slobbins” who knew nothing about computers and lived in a 2 bedroom apartment with 5 other guys to a billionaire is inspiring.
Chart of the Day
Things you need are getting more expensive while things that you want are getting cheaper.
Striptease: Two Mongolian wrestling coaches protested the outcome of an Olympic bronze medal match by stripping down to their underwear in a packed arena.
Hell NO: KFC is now selling a sunblock that makes you smell like a basket of fried chicken. They sold out right away because no one ever went broke betting against the taste of the American public.
Side Effects: You can’t overdose on marijuana but it might make you call your cat a bitch (and land you in the paper if your wife calls 911 and it’s a particularly slow news day). (h/t Trevor Albrecht)
Landmark Links – A candid look at the economy, real estate, and other things sometimes related.
Visit us at Landmarkcapitaladvisors.com