Too Little Too Late Regulators, The Bubble Is In
After hundreds of billions of dollars have been loaned, now the US regulators are warning about home equity loans? "At issue is the fast-growing market for home equity lending, which rose to $881 billion at the end of 2004 from $492 billion at the end of 2000, up 79 percent. Overall mortgage indebtedness nationwide climbed 57 percent, to $7.54 trillion at the end of 2004 from $4.8 trillion at the end of 2000."
Such a delay in action makes this blogger think the 'officials' wanted to pump cash into the system by any means possible, even if it meant poor loans.
"Veteran banking consultant Bert Ely said the warning comes at a time when a growing number of industry observers think the real estate price appreciation bubble 'can't expand further.' He added that whenever home prices rise for a long time, 'some lenders go overboard.'"
"Some lenders do not see a looming problem.'As long as the housing bubble doesn't burst, home equity lines should remain strong and remain safe,' said Scott Stern, chief executive of Lenders One." Chief executive?
Everybody's playing CYA. "The government warning was issued on the same day that the National Association of Realtors called for increased consumer education on the dangers of what the trade group called 'toxic' loans with predatory terms that hurt homeowners'. The group said that banking regulators were doing little to protect homeowners."
"'Consumers are also at risk, and the possibility exists that they could lose their homes' to foreclosure, said JoAnne Poole, president of the Maryland Association of Realtors."
6 Comments:
And as if on cue:
http://www.newyorkmetro.com/nymetro/realestate/features/realestate2005/12015/
This is NY magazine's cover story this week
Victory is near. We will prevail!
Mainstream media is changing its tone. A very good sign indeed.
That should begin to instill fear in buyers and sellers.
Fear, my friend, is the most powerful emotion known to humankind. Greed will should subside and give way to fear.
Based on a bunch of research, it seems that the average Joe doesn't really care about any risk involved with these loans (the value of the home will go up in a few years anyways!). They are simply jumping in now and worrying later. Most people have no clue what their loan entails including hidden fees, potential hikes in interest rates, etc. It's all too confusing to them and they "trust" the loan officers to steer them in the right direction. To me, it's just plain stupidity and if you don't know what you are getting into.. then you deserve what's coming to you.
I'm annoyed with New York Magazine. They've been huge boosters of the boom -- every week for the past couple of years it's another article on record-breaking prices, or $1M studios, or glamourous new developments.
And now they spin on a dime and are suddenly bearish.
Still, the cover story is good. It's the first one I've read in a magazine that mentions the perils of leverage.
Here are the issues from my perspective:
1) The recent rise in home equity lending is is no small part due to mortgage insurance avoidance. Consumers have demanded a "combo" first mortgage/home equity line in lieu of a high LTV first mortgage in order to avoid mortgage insurance costs. This has driven up home equity originations and has substantially increased the credit risk institutions are taking since they now have a high combined LTV risk.
2) Many banks underwrite home equity lines more in the style of personal loans or lines of credit, focusing primarily on the borrower's credit, as opposed to looking also at the collateral and other borrower attributes (e.g., debt-to-income ratio).
I don't think consumers are any more at risk than before, but some institutions may be at risk since they are providing up to 100% financing with no third-party guaranty (a/k/a mortgage insurance). That's the real issue.
PS I am a senior executive of a large financial institution with 30+ years in mortgage lending and real estate.
This is nothing but plain office politics... as Ben mentioned, it's CYA... in the corporate world, that just means that something is going to happen or change in the near future... and that everyone needs to send out their emails or in this case make public speeches to bolster their defensive position, when the stuff hits the fan...
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