The Home as Miracle Subprime ATM Re-Surges

Clearly, American consumers failed to do their job of propping up GDP in the fourth quarter.

GDP was crummy, with its snail-like growth rate of 0.7%, hammered by energy, exports, production, and inventories that are coming out of everyone’s ears and that businesses are finally whittling down. Even auto production has suddenly softened though it had been booming for years. And spending by businesses, which are caught up in a wave of cost-cutting and financial engineering, was dismal.

So the powerful force that was supposed to have propped up GDP was consumer spending, which accounts for 70% of it. Economists were in total agreement that consumers had “every reason to spend,” with the official unemployment rate being so low and credit so easy. But consumers just didn’t go along with the program enthusiastically enough. The warm weather got blamed.

But there’s hope.

Even while businesses are cutting back and slashing expenses, consumers are rediscovering in massive numbers the miraculous concept of using their homes as ATMs.

The housing market in many cities has by now transcended the crazy peak levels of the prior housing bubble, the one that everyone called “bubble” only after it had imploded, while denying its existence throughout its life.

And consumers are once again using these soaring home prices, ephemeral as they may be, as miraculous ATMs that just keep on giving.

So Equifax reported today that the number of first mortgage originations in the January through October period soared 37% year-over-year to 6.64 million mortgages, and that the total balance of these first mortgages skyrocketed by 51%.

$1.56 trillion of first mortgages were originated in the period, the result of a booming number of mortgages combined with rampant home-price inflation. Note, these are just first mortgages and do not include refis.

It’s all there, including surging subprime.

The number of first mortgage originations for subprime borrowers over the period soared 28% to 312,000. The total amount of those new subprime mortgages skyrocket 45% to $50.7 billion. Again, more mortgages combined with home price inflation.

Equifax defines “subprime” borrowers as those with an Equifax Risk Score of 620 or below (similar to a FICO score), on a scale where 850 marks the top end. The lower the credit score, the higher the credit risk.

The report explained, “credit standards are becoming more accommodating to meet market demand.”

Of course. We knew that. We figured that out during the last subprime fiasco. And so the inevitable: “The industry is also seeing an increase in subprime activity within the home equity market.”

Turns out, home equity extraction is booming.

Total outstanding balances of home equity lines of credit (HELOCs) have risen to nearly $500 billion. Those are the actual amounts owed. Credit limits, which also reflect unused credit, are far higher. So credit limits of new HELOC originations over the period hit $121.6 billion, 20% more than were originated a year ago.

And the total number of new HELOC originations rose 12% to 1.17 million, the highest since 2008. Ah, the beauty of Housing Bubble 2. And credit limits of subprime HELOCs rose 7% during the period to $608 billion.

Similar trends are bubbling up with home equity installment loans. Over the same period, $21.9 billion were originated, up 20% year-over-year. Outstanding balances as of December hit $132.7 billion. And the number of home equity loans originated for subprime borrowers shot up 25% to 652,200 loans, the highest level since 2008.

This is a great moment for the US housing market.

The Fed has finally healed it. We’re back to our old tricks. Home prices have been inflated to crazy levels in many cities. And now everyone is once again certain that you can’t lose money in real estate, that home prices will always go up, and that at worst, there might be a “plateau” for a few months. Forgotten are the lessons, bank collapses, bailouts, and shenanigans of just a few years ago.

Economists are once again hoping that consumers – prime and subprime borrowers alike – will use their inflated home prices as miracle ATMs, to extract the home price increases via HELOCs, home equity installment loans, and refis, and that they spend this money quickly before the next housing crash comes along and pulls the rug out from under all of it.

Consumers need to borrow and spend to prop up this economy because businesses aren’t doing it. They’re cutting back while blowing borrowed money on financial engineering projects, rather than productive investments. The result is a toxic cocktail. Read…  Already Lousy Corporate Investment Comes Totally Unglued

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  40 comments for “The Home as Miracle Subprime ATM Re-Surges

  1. Curious Cat says:

    Ground Hog Day?

  2. Mike R. says:

    … the number of first mortgage originations in the January through October period soared 37% year-over-year to 6.64 million mortgages, and that the total balance of these first mortgages skyrocketed by 51%. $1.56 trillion of first mortgages were originated in the period….

    I submit that alot of this was pent up demand waiting for prices and the economy to “recover” and including final moves for retirement. In great areas to retire, prices did indeed recover and then some.

    It also included lots of people moving from depressed areas of the country to those that are more economically active. A trend that will continue.

  3. Vespa P200E says:

    Well, I got HELOC 4 months ago on a house I bought 4.5 yrs ago in SF bay area as reserve to tap into and pay off the employer’s interest-free loan.

    I think there won’t be another HELOC blow-up like the 2006/7 when people borrowed against the house to finance vacations, boats, college education, etc. I would think the banks issuing HELOC would also think twice given the hard lesson learned from short sale and reposition saga from 2007 to 2012.

    • SquarePeg says:

      I think that all the banks learned is that collectively they are too big to fail and that tax dollars will bail them out before too many non performing loans bury them. In other words they are lending us our own money.

      • walter map says:

        “In other words they are lending us our own money.”

        It’s not your money. It’s their money. They’re just letting you use it until they can loanshark it out of you.

        It has their name on it, “Federal Reserve Note”, just so people won’t have any excuse when they get burned for not understanding the concept.

        Everybody is bankrupt. Most people just haven’t been notified yet.

        • Genevieve Hawkins says:

          “In other words they are lending us our own money.”

          It’s not your money. It’s their money. They’re just letting you use it until they can loanshark it out of you.

          It has their name on it, “Federal Reserve Note”, just so people won’t have any excuse when they get burned for not understanding the concept.

          Everybody is bankrupt. Most people just haven’t been notified yet.”

          I would like this comment 100 times if I could…

        • SquarePeg says:

          I completely agree…When I wrote “lending us our own money” I meant it figuratively.
          I don’t live in the US and I am not a citizen…just watching from afar in amazement and terror…Maybe I don’t even know what I’m talking about.
          What I see is that they are in fact using this bailout scheme, among a host of other things, as a way of redistributing wealth from the American taxpayer who has saved their “Federal Reserve Notes” to their bankster friends using the borrowers who can’t pay their loans off.
          Then they use CNBC to say things like “too big to fail” and “noboby saw it coming” after they’ve slithered away with all your losses.

    • Michael Gorback says:

      Why would you take out a HELOC to pay off an interest free loan?

      • Vespa P200E says:

        It was 5 yr interest free loan with principal due for relocation housing assistance.

  4. rich says:

    If the Fed and the Treasury wanted to, they could really fill the punch bowl. A government capable of coming up with the first time home buyers, 2011 tax credit, could be even more imaginative. For instance, there could be a government backed, interest rate buyback, say to the tune of 2%. Couple that with 40 year am mortgage, and the monthly P&I payments would be only $908. And, since the median price of a brand new home in the U.S., in December of 2015, was only $288,900, it would be far cheaper to buy a new house than it would be to rent. There would be a building boom, and the economy would live happily ever after—-until it died.

    • rich says:

      “buyback” should have read “buy down”.

    • Petunia says:

      I wouldn’t buy a house at any price because no one I know has any job security. If I could buy the house I now rent, for half the rent, I still wouldn’t buy it because I don’t have the confidence I could keep it in this economy/job market.

      • Ptb says:

        In some areas of New Mexico, one can buy a house with a 20% down , 30 year fixed rate mortgage and have PITI payments that are 33% of what the house currently costs to rent. Very common, actually. Talking to tennants, it s an income issue….both insecurity and lack thereof.

        • nhz says:

          In Spain for the last 5-10 years you could buy a nice home in many of the newer developments without down payment (or with some government assistance) and with variable mortgage rate at Euribor plus 0.5%, which has hovered at 0-1% for several years now – their cost is many times lower than renting. Many younger people purchased a home there that they would never be able to afford with normal mortgage conditions, but due to exceptional circumstances can easily afford it even if they have a very simple part-time job.

          Now the ECB has to ensure that Euribor rates never go up again in Europe, and they are well aware of this Spanish issue…

        • william says:

          New Mexico? That’s good to know. Zillow provides data on rent to purchase ratios of cities around America. None indicate the situation you mention. The best ratios, according to Zillow, are often in places with declining populations and/or staggering property taxes (too situations I tend to avoid).

    • nhz says:

      Much of that is fact in the Netherlands, the country with the most crazy mortgage deductions, subsidies and guarantees in the whole world. With the result that total debt in the country is one of the highest in the whole world; luckily for politicians, the mortage debt is usually not mentioned when total debt load of EU countries is compared. People who have to rent in the free rental market (e.g. because they don’t have a fixed-term contract and don’t qualify for social security) pay 2-4x more for the same home as those who ‘buy’.

      The result is a huge bubble in home prices (and land prices for the few locations where building is allowed), but definitely NOT a building boom. Politicians have done everything they can to limit new building in order to push prices even higher – although that might change now, due to the huge numbers of migrants entering the country, who are all entitled to a home, to be paid by the taxpayers.

      Of course most of those who ‘buy’ a home in Netherlands aren’t really buying anything, as 103% mortgages are still the norm over here (downpayment? a ridiculous concept in the Netherlands) and a big majority of all new mortgages come with full taxpayer insurance against loss when selling the home. It is all designed to get rich quick with other people’s money. The Ponzi is still in full swing and the historically low interest rate makes things even worse; watch out below when this now 25-year old bubble finally collapses.

      • Wolf Richter says:

        Fascinating. I have friends who just bought a house in the Netherlands. He’s a journalist (“Wouter the Dutch guy” in my book BIG LIKE) and she too has a good job, but neither makes a lot of money. They have two kids. I was wondering how they could afford a house at these prices. You might have just explained the secret sauce.

        • nhz says:

          Yes, the Dutch government pulled out every trick they could think of to increase homeprices, and most of the voters like it. But of course this is just inflation, fake wealth.

          You can buy a lot of home here even with two low paying jobs, but if the mortgage is over 350K or so (the limit has been declining lately to 250K or so this year) you don’t have a free put option from the taxpayers in case the home value declines below your purchase price. So in this case you really have to hope that homeprices will never go down again (they declined around 20% after 2008, which is peanuts compared to the 400-500% runup in the years before).

      • Quigly says:

        What percentage of people in the Netherlands rent vs own?

        Hence, is what you’re describing rare, or can everyone there expect such largesse?

        Banks are in fact subsidizing the people, rather than the opposite here in the USA.

    • SquarePeg says:

      Jim Rickards says…”Get ready for helicopter money.”

  5. JayDub says:

    Fannie Mae came out with a new subprime product in December called HomeReady. Higher debt to income ratio, lower down payment and designed to help lower income neighborhoods. Sounds familiar….

    The key difference with bubble 2.0 is the fact that the underwriting for the first mortgage has been generally stronger. The borrowers can document that they can afford the first mortgage whereas in 2005-7 borrowers didn’t have to document and therefore fudged.

    So, when SHTF I’m thinking the banks will be writing off a lot of bad HELOC, however foreclosures may be less since the first is still affordable. With that said, the ones who used the seconds to absorb other debt i.e. Car loans, credit cards, etc could be sitting pretty…

  6. Petunia says:

    Last week, BankUnited, a regional bank in Florida reported they will no longer originate mortgage loans. Either there is no demand or they don’t want the exposure. You decide.

  7. jeremy says:

    Interesting. Wolf presents the grim statistics and the TTID (this time its different) crowd responds. I guess some people believe a 400 point move in the Dow means everything is just fine. If so, that is REALLY something to be worried about.

    • nhz says:

      Agree, seems that people never learn. In Netherlands people would reply “If the sky should fall, we will all be wearing blue hats”, meaning something like “we will all be in the same trouble so it isn’t relevant”. No doubt many of them are counting on the few financially responsible citizens and the government (taxpayers) to bail them out again when things go wrong, just like what happened for many in 2008.

      Don’t know about the US but in Netherlands the temporary downturn after 2008 had very little consequences for most homeowners. Many mortgages are still ‘under water’ (by definition, as the average mortgage already starts under water here) but very few people have really lost their home and lost money as a result. Most losses in the housing market were absorbed by the taxpayers and the banks (again the taxpayers, because all major banks were controlled by the government for some time).

      You get cases like a politician who owed more than 1 million euro mortgage, paid off about 100K and had the rest of the mortgage written off by the bank because he ‘could not pay’; he still lives in his millionaire home. Many ordinary people pulled similar tricks and feel entitled to acting like this. This is what people learn: don’t try to be honest and you will get away with it; the next bust will be much worse as a result.

    • JayDub says:

      What do you mean?

  8. Brian Richards says:

    There may be a lot of distortion in many of our “markets” around the world. When it comes to real estate, look at world capitol flows in addition to local markets. Europe is not doing so well and China is experiencing “growing pains”. With the recent removal of restrictions on foreigners purchasing real estate in the US, look for more money going into US real estate and US stocks. I know, from local viewpoints, all we can see is “high” prices, both in ownership and rents. Foreigners may see our prices, as either reasonable or cheap, or the purchase of US real estate and stocks as an “insurance policy” for part of their wealth. By the way, if you think US real estate is expensive, check out Mexico, (where the rule of law is quite shaky) or dozens of other “emerging market” countries, where $200k won’t buy you much, and as a bonus you get poor infrastructure and non potable water. You might be shocked that properties in Puerto Vallarta, San Miguel, etc cost as much as Malibu. Or look at crime ridden San Jose, Costa Rica with $US500K houses complete with bars on all the windows and prostitutes down the street. Thinking Bangkok is cheaper? Or Manila? You will quickly come to the conclusion that US real estate is good value.

    • nhz says:

      In general I think foreign real estate is only expensive near the capital and other locations where foreigners with big money are buying ( coastal areas, near major transportation hubs etc.). Prices are also influenced by how secure the home ownership laws are and if there are favorable laws regarding taxation or anonymity for foreign buyers (definitely a factor for foreigners in the UK)

      If you look within Europe, although some countries like UK and Netherlands are on average very expensive compared to others, in the big capitals the prices are often more similar (similarly overpriced) and within countries there can be big differences in home prices. A home that costs e.g. 500K euro in the Netherlands could cost 200K in Germany (just 250km west), 50K in rural Spain or 25K in some of the Balkan countries.

      BTW, I remember from homebuyer TV programs from the US that homes there can indeed be very cheap there compared to most of Western Europe, probably first of all because land can be really cheap in the US. In my country just the land value for a small row house with tiny garden can be easily north of 100K euro, often more than the construction cost of the home itself. But I doubt a trophy home in SF or NYC is a solid investment in the long run, given the enormous increase in prices there over the last 30 years or so.

      Sooner or later the Ponzi that pushed up prices will collapse and it remains to be seen how safe home values are in that case (not even considering mortgage debt issues). My own city has record debts as a result of speculating in land for future expansion. Agricultural land is valued at 3-4 euro per square meter over here, the city paid 20-50 euro to well connected farmers (or politicians who got in between) and hoped to sell the land for new homes at 500-1000 per square meter. Problem is: there is no population growth in this city or even the whole province so this land has been sitting on the books for years and nothing happens.
      Some of the future profits were already booked because ‘land values can only go up’. But two years ago the government started to clamp down on funny accounting, and now cities have to book the land that won’t be developed within 10 years at market value, 3-4 euro/sqm. The city has been able to hold on because the debt for all this land they don’t need was ultra cheap, but that won’t last forever and without actual sales they can’t even cover the interest payments so with the new accounting they are more or less bankrupt. Many other cities used the same tricks …

  9. Michael Gorback says:

    I just sold some commercial real estate in Houston at 2x what I paid. Gettin’ out while the gettin’ is good. The only commercial RE I still have is a share of a medical office building that’s 100% occupied.

    Not sure what to do with the cash though. Nowhere to put it.

    • Vespa P200E says:

      Good move on unloading RE now. My ex-boss literally made killing buying commercial RE and McMansions in 2010/11 and been selling it. I think you have few months to roll the proceeds to another property in before IRS come by for their “shakedown”?

    • VegasBob says:

      I’ve got a similar problem. I’ve got municipal bonds that are being called and there is absolutely nowhere to reinvest any of that money.

      If I convert the funds to actual currency, the government will confiscate the cash when they find out about it.

      Real estate prices are a joke.

      Stock prices are a joke. A lot of dividend stocks pay those dividends with what is basically borrowed money. Pathetic.

      Options are written by people who expect not to ever have to pay off, usually because they know something I don’t know.

      Corporate bonds are a bigger joke than stocks.

      Top quality municipals bonds pay under 3% for 30 years. That’s a joke.

      And gold and silver prices are manipulated beyond belief.

      So yeah, there’s nowhere to put it.

      How can this crazy system not eventually implode?

      • hidflect says:

        Ozzie oil stocks. Santos, Beach Petroleum, Senex Energy, Origin Energy, etc.

  10. Ptb says:

    Getting a mortgage for the last 8 years has been about as difficult as it’s ever been, but as the real estate market has recovered there’s been a trend torwards softening. In the years leading up to 2008, most mortgages were adjustable rate, and could be gotten without proof of income. We’re not near that level of yet. But it does look like we’re headed there , again.

  11. Steve in Flyover says:

    As actual pay raises for the wretched refuse seem to be against the laws of nature/free markets/whatever, someone’s gotta figure out a band-aid to hide the reality.

    And what’s not to like? Give out free money based on BS equity, and bailouts for the banks and the stiffs when the SHTF.

    As a “normal” economy has been trashed by the PTB, you gotta do something to pretend that “prosperity” still exists.

  12. MSDR says:

    It seems to me that by not punishing the ones in charge and not having consequences (except those who lost their homes) in 2008 the financial meltdown did not seem like a big deal. The banks were propped up so no great financial meltdown and consequences. Psychologically, it did not have the impact of a Great Depression which influenced the minds of a generation. It is like with a kid. If the punishment is too mild it does not make an impression and guess what, they do it again.

    I wonder what happens when homeowners and people with huge school loans cannot pay them back. The already killed the seniors so know “they” will destroy everyone except the rich.

  13. walter map says:

    That’s what happens when you don’t pay people who do the actual production.

    What goes around, comes around. Or not, as the case may be.

  14. Bobster says:

    Remember Washington Mutual? Newspapers in many places were full of ads for their 1% start rate mortgages in 2004-5. Houses are worth what the lender will lend, and most lenders just follow each other over a cliff, time after time. Nobody can conceive of making less money or losing money. And yet it happens…

  15. Jonathan bello says:

    Any purchase in the real estate market should be in the smaller cities, not NYC or Boston or SF. You still have enough demand in US for renting them and thereby carrying them.
    But outside in the semi-rural areas its Section 8 ( underclass support) for the renting and poor classes. But as tenants on average, they are irresponsible and destructive of the houses they live in.

  16. michael says:

    Lenders are doing a full court press selling refinance loans with cash out. Its on television, its on the radio along with scammers selling their home flipping and tax lean crap. The end certainly must be near……..

  17. billyboy says:

    Over 20 Trillion was given to the big banks (most of it from the FED) in the last “crisis”. They could of paid off ALL the mortgages (both commercial and residential). I’ll be that would of helped main street. The Ponzi continues!!!

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