weekend commentary - US consumers' last source of borrowed money being sealed shut ..
Russ Winter again puts his excellent nose for systemic financial bulls#@t to work and provides this valuable early warning ...
(snip)"On the never ceases to amaze me department comes a perplexing report from Calculated Risk’s blog that mortgage equity withdrawals (MEW) were much higher than expected in the 4th quarter. Looks like JULS [ Joe UltraLight Sixpack i.e. technically bankrupt American consumers - sic] may have found another wormhole in which to borrow. No, not just credit cards, as apparently, he simply substituted borrowings from home equity lines of credit (HELOC) in lieu of mortgage refinancings. HELOCs (an over trillion market) doesn’t get much attention from commentators. I myself had assumed that this source was largely shut off. I still kind of question if HELOC lending was that active in the 4th quarter, and what this estimate is based on. Data from the Fed which covers commercial banks (about half the source) shows HELOC balances increased by about $16 billion during the quarter.
MEW had been expected to decline precipitously since mid-summer 2007, with a combination of tighter lending standards and falling house prices. However, in Q3, MEW was supported by homeowners drawing down pre-existing home equity lines of credit (HELOC). The sizable MEW in Q4 was probably related to home equity lines too (as opposed to cash out refis of a couple of years ago).
http://wallstreetexaminer.com/blogs/...mewadvance.jpg
Astonishingly, it appears it is only now, that the rocker scientists at “banks” like Countrywide Financial and Chase have connected the dots about this horses out of the barn door source.
Among the lenders taking such action is Countrywide Financial Corp., which sent 122,000 letters to customers last week telling them they could no longer borrow against their credit lines. In some cases, according to the company, the borrowers are now “upside down” — the total debt on the home exceeds the market value of the property.
Chase Home Lending, a unit of banking giant JPMorgan Chase & Co., one of the country’s largest home equity lenders, is imposing new guidelines next week that will further restrict who can get a new credit line, the company said. Through this week, Chase customers in California can tap as much as 90% of the equity in their homes. Starting Monday, however, that limit goes down to 85% in most of the state. In six counties, including three in Southern California — Los Angeles, Orange and Imperial — Chase won’t let homeowners borrow more than 70% of the value of their homes. The bank wouldn’t say how the six counties were chosen. In Florida and Nevada, Chase’s loan limits are going down Monday to 70% and 65%, respectively.
And even applying minimal intuition, it is not difficult to predict what is coming on HELOC loan performances. As much of this is found in underwater mortgages, the recoveries should be non existent too.
Countrywide set aside $924 million for credit losses during the fourth quarter, compared with reserves of $73 million during the final quarter in 2006. The mortgage lender also recorded an impairment charge of $831 million during the quarter tied to securities backed by prime home equity lines of credit typically reserved for borrowers with excellent credit histories."(snip)
from
the basic uptake here is that, as much as the US economy declined in the 4th quarter of last year, tapped out consumers still managed to spend more money than they earned via borrowing against Home Equity lines of credit. Now that the mortgage lenders have finally woken up (duh !!!), these lines of credit will be shut down ASAP. As HELOC's were about the last source of credit after credit card limits / interest rates shut off consumers from adding to their credit card balances, and after new mortgage lending regulations shut off cash out re-fi's, it would appear that the US consumer is FINALLY going to be forced to cut spending down to match their actual level of income.
Also, the generally accepted statistic has been that Joe Sixpack has been spending about 6% more money than he actually earns via additional borrowing. So if this last line of credit is shut down, this will correspond to a 6% reduction in US consumer spending. However, keep in mind that 'necessary spending' cannot and will not be reduced, and is likely to increase along with increasing prices for gasoline, food, taxes etc. Thus US consumer spending on non-essential items is likely to decline FAR more than 6%.
Re: weekend commentary - US consumers' last source of borrowed money being sealed shu
Americans have a strange notion of "necessary spending."
Re: weekend commentary - US consumers' last source of borrowed money being sealed shu
Quote:
Originally Posted by
Deogol
Americans have a strange notion of "necessary spending."
http://www.bls.gov/opub/uscs/2002-03.pdf
notice the chart of "Expenditure share for non-necessities"
Re: weekend commentary - US consumers' last source of borrowed money being sealed shu
Quote:
Originally Posted by
lunchbox
notice the chart of "Expenditure share for non-necessities"
I hate you. ;D
To bad it's just George Bush lying to us again!!!
Re: weekend commentary - US consumers' last source of borrowed money being sealed shu
It would be great if the data extended through 2007 !