Fuel for the Next Mortgage Bust?

Cash-out refi hype is back full-blast. And for the first time since early 2006, people are doing it in large numbers.

This is the transcript from my podcast last Sunday, THE WOLF STREET REPORT:

For a moment this morning, I thought I was back in 2005 or early 2006, when I listened to a dazzling radio show, hyping cash-out refinancing of your mortgage.

The show was funded by a shadow-bank specializing in mortgage lending. They were promoting their efficient service, that didn’t involve the normal hoops to jump through, and it was a fantastic deal, to not only refinance your mortgage to capture the lower mortgage rates currently available – the lowest since November 2016 – but also to use the home as an ATM once again to cash out the equity that the home had accumulated, due to years of sharp price increases.

That this date of November 2016 keeps popping up is interesting by itself, because on November 10, 2016, according to Freddie Mac data, the average conforming 30-year fixed rate mortgage had an interest rate of about 3.6%, same as now. But six weeks later, December 22, 2016, that average mortgage rate had jumped to 4.3%. That was a jump of three-quarters of a percentage point in just six weeks. Mortgage rates can get very jumpy when the market figures out that they’d been mispriced.

The promo this morning acknowledged this jumpiness and pushed listeners to act now on a cash-out refi at these ultralow mortgage rates, or miss out forever.

This phenomenon – these radio shows paid for by shadow lenders and mortgage brokers that are hyping cash-out refis – is now everywhere.

Of course, it makes total sense for homeowners to refinance an existing mortgage with a mortgage that has a significantly lower rate. This cuts their monthly payments and gives them some extra spending money, but it doesn’t raise the risk for the lender. And it might even lower the risks for the lender because the payments are lower.

The problem starts with cash-out refis, when the home gets leveraged up to the hilt to fund household consumption, such as vacations, home improvements, paying off credit card debt so that credit cards can be charged up and maxed out once again, and the like.

Economists and the Fed love this activity because it creates more debt-based consumption. William Dudley, when he was still president of the Federal Reserve Bank of New York a couple of years ago, exhorted Americans to do just that, to leverage up their homes and draw out those funds, and spend more on consumption, particularly on things they don’t need, because presumably, they’ve already been buying all the things they need.

The principle is this: People don’t have to be paid more for their work to spend more; they can just borrow more.

And it works great for a while, and then there is a reset of some sort. That reset last time was the Financial Crisis and mortgage crisis. And after the reset, things start from scratch.

At first, cash-out refis go unnoticed, essentially. They’re an opportunity for the finance industry to make a lot of money off of fees. And so the industry is jumping all over it, as the radio promo this morning explained. It said that it had staffed up for this boom in refis, that it had hired a bunch of people, and that they’d had a record week in terms of refinancing mortgages, but that, because their system was so efficient, and because they’d staffed up for it, wait-times hadn’t increased.

Mortgage refinancing is a huge business – with boom and bust cycles. And it is booming at the moment. According to the Mortgage Bankers Association, the refinance activity, in terms of the number of refi mortgage applications, has soared by 140% since the end of last year, with the index leaping from about 830 to over 2,000 in just seven months.

And a good part of those refis are cash-out refis.

But cash-out refis have a nefarious impact on the banking system – and these days particularly on the shadow banking system, which is now the dominant player in the mortgage business.

Wells Fargo used to be the number 1 mortgage lender in the US. As of a couple of years ago, the largest mortgage lender is Quicken Loans – a non-bank lender that does not take deposits and is therefore not regulated by banking regulators such as the FDIC and the Fed. Hence, lovingly called a “shadow bank.” And there’s a slew of these specialized shadow banks, including the one whose promo I heard this morning.

They’re making hay while the sun shines. Do your cash-out refi with us now or miss out on it forever. That was the message.

However, purchase mortgage applications – so mortgage applications by people who need the mortgage in order to purchase a home – they have essentially gone nowhere since December.  This means that despite the much lower mortgage rates, potential buyers who need mortgages to buy a home have not suddenly come out of the woodwork.

That’s a huge disappointment for market prognosticators and oracles, especially those by the housing industry, who’d predicted that these lower mortgage rates would entail a surge in home sales – and a surge in home prices. That just hasn’t happened.

Then we get this: Two weeks ago, the National Association of Realtors reported that home buying in the US by non-resident foreign investors over the two-year period through March 2019 collapsed by 56%. It wasn’t just Chinese investors. It was foreign investors from all major countries, including from Canada and Mexico, that radically slashed their home buying in the US.

And so the results have been trickling in with relentless regularity: Sales of existing homes in June fell for the 16th month in a row compared to the same month a year earlier and were down about 4% from the prevailing range in 2017.

In other words, Americans are not buying more homes despite lower mortgage rates; and interest by foreign buyers has collapsed. As a result, homes sales are down despite the lowest mortgage rates since November 2016.

In some of the most expensive markets in the US, the home-price surges of recent years are already cooked. This includes the Seattle metro and most of the Bay Area. In other metros, the year-over-year price increases have been shriveling month after month.  All this is happening despite the lowest mortgage rates since November 2016.

Why? Because mortgage rates are not the only factor. Home prices have been inflated for years. In a number of markets, home prices have become absurd. And there comes a time when buyers get second thoughts – when they simply cannot imagine paying this much for so little. And they refuse to buy at those prices.

The plunge in foreign buyers – they were concentrated in a relatively small number of markets – has also reduced the heat.

So it makes sense that in some markets, home prices have already peaked, and that in other markets, home prices are approaching their peak.

This brings us back to cash-out refis: Last time, they were hottest just before the market peaked. And this made the housing market so much more vulnerable.

Homeowners with lots of equity can withstand a housing downturn and are unlikely to just mail the keys to the bank. In addition, if they lose their jobs in an economic downturn and can no longer make the mortgage payments, they can sell the home that has equity in it, even after prices have dropped, and they can pay off the mortgage from the proceeds of the sale and have some cash left over to get them through the rough spot.

Homeowners who did a cash-out refi and sucked the equity out of their homes were sitting ducks in the housing bust. It didn’t take much of a price decline before they had negative equity, and they couldn’t sell their home for enough money to pay off the mortgage, and so the downward spiral toward foreclosure, bank collapses, and bank bailouts began.

Note that during the financial crisis, shadow banks were not bailed out, at least not directly. The ones that managed their risks well survived without bailout, but others were allowed to collapse.

Now cash-out refis are hot again. And with perfect timing: once again, in some metros the market has already peaked. And in other metros, the market threatens to peak. But this time, the banks are not the big partiers. Not only are they less aggressive in trying to write these cash-out refis, but they’re also offloading much of the risk to investors and government entities that guarantee or buy the mortgages and package them into mortgage backed securities.

Shadow banks also try to offload much of the risk to investors, but they’re much more aggressive in the cash-out refi department. And they’re much more vulnerable.

However that may wash out, we know one thing: the low mortgage rates that have triggered this refi boom are infusing more risks into the financial sector, and they’re encouraging households to leverage up by doing a cash-out refi, and they’re turning these households that used to be fairly low risks into households that are now suddenly vulnerable again, and they’re taking away the wriggle room these households used to have.

Currently, employment is strong and people are not losing their jobs in large numbers. Unemployment claims are near historic lows, as is the unemployment rate. And under these conditions, households are unlikely to get into trouble with their mortgages. So mortgage delinquencies are near historic lows. And we’re tempted to say, “so far, so good.” But there is an old banker saw: Bad deals are made in good times. And these are mind-numbingly good times. As in 2006, the bad deals come out of the woodwork only after the cycle turns.

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  65 comments for “Fuel for the Next Mortgage Bust?

  1. Aug 14, 2019 at 3:06 pm

    My first thought is that these cash-out-refis don’t seem to be feeding car sales much. So what ARE people doing with this money? Buying Uber stock?

    • roddy6667
      Aug 14, 2019 at 8:35 pm

      A lot of people swap short term credit card debt for mortgage debt. 36 months vs. 360 months, much lower payments. Much more interest in the long run, but nobody cares about that.

    • daniel weise
      Aug 14, 2019 at 10:40 pm

      Yes Uber,Imagine Meat and other sure Bets. Last Chance to get into Chipotle ,the Burrito Shack at only 790.00 $ per Share,we’re all going to be rich!

  2. Aug 14, 2019 at 3:06 pm

    The number of retired people holding mortgages is off the charts. These are people who expect that big check from their pension fund every month. They will live a lot longer too, making destitution even more painful. If you’re 60 and you live to 90 but you go broke at 70?

    • alex in San Jose AKA Digital Detroit
      Aug 14, 2019 at 8:11 pm

      This is why I’m holding off on SS until at least 65. I thought I’d kick off in my early 60s like my parents did, but it turns out my relatives are all getting near 100 – my parents just didn’t take care of themselves.

      The plan to retire to Hawaii is seriously on the back burner. I spent some serious time on “man in the street” videos of there, particularly how it is for those who are homeless or semi-homeless, and it’s not pretty. The place has really changed. The old streets and beaches are barely recognizable. Yeah they can’t change Waimea Bay, but tons of places I held dear are different, most very different.

      • Iamafan
        Aug 15, 2019 at 6:08 am

        If you are not yet 65 now, then the earliest age to get full SS retirement amount is now 66. Make sure you keep up with the SS mailers or website.

      • Ed
        Aug 15, 2019 at 8:58 am

        alex – The weather is getting worse and the reefs are dying as well. Add to the that being trapped on an island inhabited by miserable locals and swarms of tourists.

        West coast of Mexico or central coast California seem to be solid value retirement spots. Easy plane ride to Hawaii if you still want to go on vaca.

  3. Michael Engel
    Aug 14, 2019 at 3:18 pm

    World record will be set when : the German 10Y @ minus 0.656 and the 3M @ minus 0.656 will invert underwater.

  4. Michael Engel
    Aug 14, 2019 at 3:20 pm

    Correction :3M @ minus 0.690.

  5. David Hall
    Aug 14, 2019 at 3:36 pm

    Last year Nobel Prize winning economist Robert Shiller said we (US) were in the third worse housing bubble of all time.

    Sydney made a top ten housing bubble list last year. Australia is now going through the worse drop in retail sales in 28 years.

    Debt rose in different sectors. Student debt/GDP is near an all time high. Commercial debt/GDP is near an all time high. Farm debt is close to 2% of GDP. Farmers need govt. assistance due to the trade war.

    I have not seen a measure of cash out refinancing to the level of the last crisis unless some debt is not included in the Fed report of household debt/GDP.

  6. CreditGB
    Aug 14, 2019 at 3:48 pm

    Retired a year ago. Have 3 house payments left, and zero other debt. Living reasonably good life, enough to enjoy a few things. All options are still on my table. Didn’t fall for the “debt is good” crap being sold since the 1970s. Feel bad for the debt loaded folks driving $75,000 SUVs who have to add to their CC balances just to buy food and gas.

    • Paulo
      Aug 14, 2019 at 6:52 pm

      Congrats on the house ownership. There is no greater feeling than not having a mortgage. I built a small rental last year and use the rent for insurance, taxes, upkeep, etc on main house and property. If I didn’t do that I would have a side business for the same purpose. Anyway, it sounds like you are set for the future.

  7. Michael Engel
    Aug 14, 2019 at 4:06 pm

    1) World record was set today, the first underwater inversion :
    Switzerland 10Y @ minus 1.007 vs 3M @ minus 1.000.
    2) All rates in Switzerland up to 50Y and in Germany up to 30Y are underwater.

    • Unamused
      Aug 14, 2019 at 4:34 pm

      Danish bank launches world’s first negative interest rate mortgage

      • Saltcreep
        Aug 14, 2019 at 6:17 pm

        Hey, Unamused, shouldn’t those loans then have to flip sides on the balance sheet as they become income producing assets..?

        Imagine adding a piece of property and an income earning asset to the assets on your balance sheet in the same operation, with the only offsetting entry being your equity!

        Our wealth will become unimaginable as we bid up everything in sight into the sky in order to increase our income streams. We will all become the envy of King Croeses!

        • Dale
          Aug 14, 2019 at 8:34 pm

          Coming to an economy near you, within the next few years:

          1. Cash-out refi on your $1M house, 100% LTV.
          2. Get the -4% interest rate mortgage on your refi.
          3. Live comfortably on $40K per year.

          The only problem is where to put the refi cash, as the banks will expect you to pay to store it.

          OK, the ‘experts’ say that the CBs can’t drive interest rates much below 1% for various reasons (but we expect them to try!). And at some point, inflation will show up and interest rates will shoot up, or currencies will be abandoned. But still interesting…

    • Rowen
      Aug 14, 2019 at 5:30 pm

      I’ve been waiting for the bond vigilantes of fiscal austerity to show up.

      • California Bob
        Aug 14, 2019 at 10:56 pm

        re: “I’ve been waiting for the bond vigilantes of fiscal austerity to show up.”

        In the Trump administration??? You’re kidding, right?

    • Gandalf
      Aug 15, 2019 at 12:13 am

      The US 10 year 3 month Treasuries have been inverted since late June

      Today, the US 10 year 2 year also inveeted

  8. SocalJim
    Aug 14, 2019 at 4:21 pm

    There will be no mortgage bust this time around. We will have a normal OAS spread widening, but no bust. People are too smart for that. First, the qualifications standards are much tighter. Secondly, rental demand is off the charts meaning most well located homes can be easily rented at a high enough rent to service the mortgage. Thirdly, the “sky is falling” propaganda can not be played on the public again. FYI … I am seeing more deals struck in the housing market than several months ago. The low mortgage rates are having a positive effect.

    • Iamafan
      Aug 14, 2019 at 4:33 pm

      High risk and crisis are two different things. Risk does not necessarily lead to a crisis although it might be deemed as a vulnerability. We just don’t know what will light the match and when.

      As adults, we all have different risk tolerances and have different opinions. I believe this article is talking about vulnerability or hightened risk only. No crisis yet.

    • Petunia
      Aug 14, 2019 at 5:10 pm

      I see plenty of foreclosures on Zillow, most purchased in the last few years. It’s not about the mortgage amount, it’s about the income. Good luck with your rentals, everything I read says CA is turning into a third world country.

      • JZ
        Aug 14, 2019 at 5:27 pm

        Homeless folks like CA, good weather.
        But Socaljim will make sure they won’t show up near his properties so when CA is falling, Socaljim will be fine.
        I don’t know about rental can service mortgages. In my area, rent/price is like 3%. Mortgage is 4%.m and there is property tax of 1.2%. I won’t buy anything unless they give a me 6% rent/price. But based on Socaljim, this is fairly valued and if you don’t buy now, you will forever be priced out.

        • alex in San Jose AKA Digital Detroit
          Aug 14, 2019 at 10:12 pm

          I’ve lived in SocalJim’s ‘hood. It’s a right-wing area, and they’ll hold out as long as they can, but they have increasingly few friends.

          Paradoxically, even back when I lived there, all the talk was about leaving. They’re happy to sell out to anyone with the money, Chinese, Indian, etc. So it’s a self-correcting problem in a way.

          Much of California is 3rd-world because much of the US is 3rd-world.

      • Iamafan
        Aug 14, 2019 at 6:27 pm

        Municipalities still need a good tax base. I got to test that today. Tree fell and brought down the electrical cables in my neighbor’s house. In about 1-2 minutes, fire trucks came. They called for power company which sent two large buckets.

        My wife got to test 911 two weeks ago when I fainted. By the time I got up, in a minute, fireman was in front of me with oxygen. EMS ambulance arrived and carried me down. I got to visit ER again.

        Yesterday I went back to my hospital and just realized it looked like a resort. Many rich families donate departments, rooms, equipment, etc. Most of the names are old rich families.

        People need to realize that neighborhoods are not equal. Without a good tax base, your town IS third world.

        • Dale
          Aug 14, 2019 at 8:39 pm

          I had a house fire 9 years ago. There were two firestations within 5 minutes (assuming all traffic control lights are observed) but nobody showed for 25 minutes. 80% of the house burned or suffered heat / smoke damage requiring reconstruction.

          It’s an affluent area, but the firemen were in the middle of their shift change. The fire department was apologetic, and the insurance company didn’t care even though it cost them $400K.

          The point being that even a good tax base won’t help you if the first responders won’t do their job.

      • GirlInOC
        Aug 14, 2019 at 6:35 pm

        “everything I read”…… Fox news????
        I’m teasing. Conservative outlets love to bash CA. Where I live, it is nowhere near a 3rd world country. When I travel out of state I always come home and feel so blessed. I’m lucky to live where I live. That said, yes there is a homeless crisis here, but it’s not unique to California in the same way the housing affordability crisis isn’t…both are the result of skyrocketing rents and housing costs and decades of stagnant incomes. Homes have become a source of wealth and when that happens even a hard-working middle-class family will be priced out of a basic house.

        • Paulo
          Aug 14, 2019 at 7:00 pm

          @GirlOC

          On the Vancouver news last night they interviewed a homeless guy who is one of the ‘campers’ who have taken over Oppenheimer Park, (one of the few green spaces in that part of the city). He basically said, “All we want is a small apartment”. Implied, “If you want us to leave we need a free apartment”.

          The local residents who pay their own way are pissed, big time.

          It is everywhere, this sense of rights without any responsibilities. Everywhere, not just in CA.

        • Aug 14, 2019 at 8:31 pm

          GirlInOC,

          You’re messing up my strategy. I want people to believe the ZH articles about knee-deep feces-and-needles from the Pacific all the way to the Nevada state line. I want people to be horrified and stop coming here. It’s too congested, too crowded, this place is full, and yet people keep showing up. They need to go to Iowa or some nice place like that. So don’t ever say anything nice about California, particularly not about San Francisco, which is a horrendously hellish place to live or visit.

        • alex in San Jose AKA Digital Detroit
          Aug 14, 2019 at 10:21 pm

          GirlinOC and Paulo – I live in California’s 3rd world and indeed, it’s grim. However, look on YouTube at any of the “homelessness in Japan” videos – the way homeless people live there, it’s not all about me-me-me. They keep their area clean, recycle if they can, etc. The culture is about “we” not “me”.

          I’ve been officially homeless since the crash. I’ve always lived in some situation where I was under a roof even if the majority of the time it’s been a structure not legal or intended for human habitation. I’ve always improved where I’ve lived. Painted, fixed, re-roofed, etc.

          I seem to be very unusual in this regard, maybe due to growing up in Hawaii in an Asian culture, as homeless people around here are huge slobs and you don’t see people teaming up and cooperating to keep their area clean etc. Instead you see huge piles of junk and trash etc.

          The nice thing about living in California’s 3rd world is, I can at least hop on a bus and visit Stanford University (a lot of museums etc there are actually free) or go up to SF and play my trumpet, or do a lot of things you can’t in flyover.

          And the rate of violent crime is far, far less than it’d be in Mesa, Arizona, or Youngstown, OH, where angry rednecks abound. I just got back from the most pleasant shopping at H-Mart, a Korean market, which I far prefer to, say, the market I used to go to in Scottsdale, AZ where you often had to request an escort to your car due to the very aggressive redneck panhandlers who’d follow you, threaten, etc.

        • IdahoPotato
          Aug 14, 2019 at 10:33 pm

          @Wolf.

          Ditto Boise.
          it is a shithole. Stay the heck away.

          Talking about CA, much of it is sour grapes, methinks. There is plenty to love about CA.

        • Petunia
          Aug 15, 2019 at 8:20 am

          GirlInOC,

          What I’m re-reading is complexity theory. How complex systems can sustain themselves for a long time while decaying, then bam, and it’s gone. That’s how the saying “the straw that broke the camel’s back” came to be, because that’s how it works. Enjoy your enclaves.

        • GirlInOC
          Aug 15, 2019 at 11:22 am

          Wolf,
          ah, that’s what we’re doing? well then….

          CA is hell. Gavin Newsom took all our straws and plastic bags and taxes us at 99%. Any surplus the state runs on is given to undocumented workers for free college, health care, and iphones. And the cost of living means I pay $100 a week on my avocado toast habit.
          Come to California, but bring your straws, plastic bags, avocados, and work ethic because we have none here!!!!

        • Aug 15, 2019 at 2:03 pm

          GirlInOC,

          Now you got it :-]

        • GirlInOC
          Aug 15, 2019 at 11:23 am

          Petunia,

          *purposefully obtuse*
          ah yes, complexity is definitely a CA thang.

        • azbc
          Aug 15, 2019 at 4:59 pm

          Yes, amen! California is the best! If you live there, you are lucky beyond measure and would be crazy to ever leave!

          –this guy in Arizona

        • RangerOne
          Aug 15, 2019 at 6:34 pm

          @alex in San Jose AKA Digital Detroit

          You only see the people on the street who end up on the street. I am sure there is a fair amount of people like you who may be what you would effectively consider homeless that find ways to continue living a mostly normal life.

          It is popular in American culture to blame big business or the government for our problems. And you do see some of that mentality spill over to those on the street.

          But a lot of homeless people on the street also are in need of medical assistance and are not in a proper state of mind. Which is the reason they have lost their family or friend ties that would have kept them off the street.

        • alex in San Jose AKA Digital Detroit
          Aug 15, 2019 at 7:43 pm

          RangerOne – thanks for the well-thought-out post. Yes indeed, a medical problem, mental illness, any of a number of things and you end up out on the street. And a good number of homeless people, you’d never think were homeless.

          The really messy ones are the 10% or so who really need serious help. I suspect in Japan they get put into a mental hospital or into jail – Japanese jails are “not too bad” to the extent that they have a problem with old folks committing small crimes to get put in there; mostly it’s about the comfort of having basic things taken care of and having company.

          Last night a guy rode up on a bike and took a nice open-air bath in the spigot next door. He was talking, yelling, and muttering, having fights with his backpack, etc. Quite a scene. I thought, though, this could be simply the effects of alcohol – a legal drug – someone in withdrawal can get pretty un-coordinated and twitchy, as well as feeling perfectly lousy. They can hear voices. And they might be on alcohol to try to mask the symptoms of some basic health problem that any rural clinic in India or Africa would cure, but in the US the poor are not to get medical care if it can be prevented.

          As for the comment someone else posted about how there have to be some of us miserable and homeless to keep the rest of us working, this is Marx 101 – “the reserve army of the unemployed”. A great book that will keep you turning pages, and will get you introduced to how this works is “The Jungle” by Upton Sinclair.

      • Ambrose Bierce
        Aug 15, 2019 at 10:12 am

        Zillow is in the house flipping business. I think they are promoting it as a palliative, like come to us first, we will flip your house before it is foreclosed and you can stay in it after you are reassessed. Something like that. I mean house flippers are the lowest form of life.

        • Jeff T
          Aug 17, 2019 at 9:45 am

          Flippers are way above private equity firms as lowest form of life.

    • Michael
      Aug 14, 2019 at 7:24 pm

      Speculation drove the previous bubble and speculation is driving this bubble or the extension of the last bubble if you prefer. As our kind host has said many times before ….”and these are the good times”. Party on grasshoppers.

  9. Maximus Minimus
    Aug 14, 2019 at 4:23 pm

    I went vacationing to the same spot where I was 5-6 years ago, and I was stunned by the number of yachts in the bay; previously scarcely a couple, now dozens. This is not a scientific comparison, but still… Times have never been so good or bubbly.

    • alex in San Jose AKA Digital Detroit
      Aug 15, 2019 at 7:45 pm

      I’m not sure it’s that simple. Could be another marina closed or a bunch of people living simply anchored, “on the hook” got told they need to move etc.

  10. nick kelly
    Aug 14, 2019 at 4:50 pm

    A few weeks ago a guy on WS told me to check out a Twitter Site called Vancouver Flip Flops. Incredible. This is Ground Zero for the collapse of the Canadian real estate supernova. Assessments are down 10 % but the market has blown through them. Sales 10% below assessment are common.

    Looks like the high point was June 2016. They are down up to 30% But even those who bought in 2018 are down up to a million and not on 10 million dollar houses. The record might be a guy who bought in 2018 for 3 mil and after expenses sold for a loss of almost one million.

    And yes it has spread to condos. In fact developers have pulled five thousand new concrete units off the market to wait for a ‘better market’.
    Re: concrete. These are not low end walk- ups, which themselves will begin around 500 K C$.

    But according to a top realtor in a Globe and Mail story (2 months ago?) about the crash, delay will be fatal: “if you delay listing you are losing 5 thousand a day’
    Maybe true, but isn’t that what you whisper to the seller? Why would the buyer want to sign up for it?

    I am addicted to it (although I’m not a twitter) and another one: Mortimer run by… Mortimer.

    Only issue with both: they sure play up the Chinese angle. Some time ago I fenced with WR, me saying the Chinese were being scapegoated for everyone’s’greed. Well their presence is bigger than I thought and they seem (a) manic in their past bidding and (b) quick to bail.
    Both sites laugh at the hopeful number of 8 s in prices. As in: “looks like 3.488 didn’t work any better than 3.588.”

    It is what is but I think their points could be made without printing the names of owners.

    Re: HELOCS. At this rate the banks will be getting a lot tighter with the amount you can take out of a house.

    • nick kelly
      Aug 14, 2019 at 4:57 pm

      PS; Van Flip Flops has some high profile commenters, including David Stockman and David Rosenberg. The latter is probably Canada’s foremost finance guy and a perma semi – bear. Distinct from Stockman who is a perma super -bear.

      • Dale
        Aug 14, 2019 at 10:19 pm

        Rosenberg aka Rosie was a bull from 2013 to 2018. Which makes him more of an observer than a bear imho.

  11. Broker Dan
    Aug 14, 2019 at 5:43 pm

    I posted the below in the Wolf Report thread as well. It’s good info as you discuss cash out lending:

    Mortgage Lender here.

    It’s interesting what’s happening in the market.

    QM mortgages are actually CUTTING guidelines for cash out refinances whilst Non-QM programs are replacing them.

    FHA: Sept 1st, they are cutting the max loan-to-value on cash out by 5%; from 85% to 80%.

    VA: Nov 1st, they are cutting the max loan-to-value on cashout from 100% down to 90% AND that includes the VA required funding fee. So realistically; it’s more like a max of 87.5% loan-to-value.

    Conv: Max is 85% loan to value, but, unless you have a 740+ credit score, that loan is VERY costly and with expensive PMI.

    Looks like the govie and GSE market is hedging risk and tightening up guidelines. Other programs are taking its place, however, the devil is in the detail.

    I.E. There is a 95% cash out loan available; however, it’s for the cream of the crop borrowers. I have one where it’s 40% DTI, 800 fico, and 36+ mos reserves; and cannot get approved b/c the MAX DTI is 35% and qualifying rate is 6.25%.

    Now some would see an ad stating “Cash out up to 95% of the value of your house”, but, upon further review it’s a very tight program for super A borrowers.

    HELOC’s have become aggressive going up to 90% loan-to-value; but, I wonder how much the new tax law affects their desirability? (Disclosure: I don’t write HELOCS)

    All in all; it feels like risk is shifting a bit to the private sector, however, they are being priced accordingly.

  12. ZeroBrain
    Aug 14, 2019 at 5:57 pm

    “Last time, they were hottest just before the market peaked.” Is there any actual mechanism linking cash-out refis to a market peaking?

    As an example of what I’m getting at – one purely hypothetical explanation would be that the cost of living gets out of hand and causes a market peak as there is no discretionary cash flow left to buy more stuff. Meanwhile, this indebtedness and cost of living prompts homeowners to cash out just to cover living expenses.

  13. Senecas Cliff
    Aug 14, 2019 at 6:04 pm

    Like Wolf, I am getting a feeling of DeJa Vu with regards to the current housing bubble. The latest signpost for me was a big new condo complex here in Portland. All Cement glass and steel with all the perks. The complex has been complete a few months but the sales were inadequate so the developer just announced that it would be converted in to high end apartments. The exact same thing happened to several Condo buildings here back in 2008 as the market tanked. The market for condos dried up and no new ones were built until 2016.

  14. RepubAnon
    Aug 14, 2019 at 7:57 pm

    It’ll depend upon how many folks are foolish/desperate enough to pull cash out of their homes. Once the tsunami starts, it’ll cause an overcorrection and lots of houses will lose lots of value that they’ll regain once the panic subsides.

  15. SocalJim
    Aug 14, 2019 at 10:50 pm

    In the few zip codes I watch closely, it is clear the low mortgage rate levels are causing a jump in pendings. Extrapolating this pattern means a substantial upside surprise in pending home sales that will be well received by markets … just in time to spoil the Democrat strategy of talking the economy down.

    • California Bob
      Aug 14, 2019 at 11:07 pm

      re: “… just in time to spoil the Democrat strategy of talking the economy down.”

      You nailed it-the Democrats’ trade war is really tanking the economy (can you believe they though trade wars were ‘easy to win?’).

      • weinerdog43
        Aug 15, 2019 at 8:18 am

        Not to mention the giant Democrat tax cut that went to the top 1% that has all but fizzled out.

    • Broker Dan
      Aug 15, 2019 at 11:17 pm

      In my immediate area (orange county) I was shocked how many homes went on the market and were immediately in escrow.

      Small sample size, but, 5-7 homes in 90 days in my little tract is a lot.

  16. California Bob
    Aug 14, 2019 at 10:51 pm

    re: “Currently, employment is strong and people are not losing their jobs in large numbers. Unemployment claims are near historic lows, as is the unemployment rate.”

    Is there an index that measures ‘quality’ of employment? If you work days at McDonald’s and drive for Uber at night you’re technically ’employed,’ right? But the quality of those jobs is far below that of the manufacturing-based, usually union jobs with benefits that were much more common a couple decades ago. If you’re financially treading water or slowly sinking with a ‘McJob’ but you have equity in your home it must be awfully tempting to cash-out refi and use at least some of the proceeds for basic living expenses (or a better Uber car).

  17. Terry Simms
    Aug 15, 2019 at 6:47 am

    I have no sympathy for these money morons that use their houses as an ATM machine. All these people who think low interest rates is a great thing can live under a bridge when they lose their house and everything.

    I’m sure many times they have been warned especially since 2008 hit to real estate and debt binge crashed housing prices from the U.S to Ireland, Spain, U.K. etc.

  18. Jdog
    Aug 15, 2019 at 11:15 am

    We exist in a debt based economy in which corrections must happen. Our economic growth is no longer organic, it is debt driven which means it must at some point reach the point where the debt can no longer be serviced by a large enough percentage of the population to cause market corrections. The real problem is that with each cycle, the middle class shrinks as both the lower and upper classes gain. The rich become richer at the expense of the middle class slipping into the lower class. How long this can continue without social unrest is going to depend in large part upon how successful the media propaganda can continue to deceive the population that it is actually prospering.

    • The Wolf of Malasti
      Aug 17, 2019 at 10:16 pm

      Agreed. This day to day bullshit of trade war on and off is all crap. Trade war permanent. Add currency war,Italian debt to EU 1.5 trillion, with French banks bearing the brunt. Spain, Portugal go down with them. Brexit. Barclays and Lloyds of London haemarraging, 3 biggest French banks no better, Citibank first contagion across Atlantic, and Australia NZ next. Thats just banks. Throw in 22 trillion US debt, corporate debt, housing clitch, trucking, automobiles, the helicopter money deemed futile, print enough to debase the dollar, gold goes berko. Inflation inevitable eventually through bonds or QE, equities bubble goes to quadruple instead of treble, but it may be none of the above that kickstart recession, or a collection, trouble starts i expect all factors to activate at once. Corporate defaults means bank defaults, fed dishing out cash like confetti, anymore sp500 dow growth look out… Coming home to roost…what a Turkey that Janet Yellen was…whete is she now…? Hanging out with R Magabe?

      • IslandTeal
        Aug 18, 2019 at 10:46 am

        Wowza…. Very well stated… The xxxx is very close to the fan right now. DB, along with it’s baggage, is edging toward 6 again

  19. Gorbachev
    Aug 15, 2019 at 11:51 am

    I don’t think mortgages caused he last crash.I am

    sure it was trillion dollar derivatives that no one

    would honor. Those instruments however did become a house

    of cards.

  20. Gian
    Aug 15, 2019 at 8:49 pm

    Why not refi and cash out? Last time around, these deadbeats remained in their homes without paying their mortgage for up to 4 years, then many banks gave them cash for keys to get the hell out. Two to 4 years later, these same deadbeats were buying homes again and many are probably the ones refinancing now and banking on a repeat. I hope this time the IRS will not grant debt forgiveness as tax exempt.

  21. Aug 15, 2019 at 11:26 pm

    There is no site other than Wolf Street where I automatically read the comments section along with the articles. What a constructive, intelligent group of readers you have cultivated, Wolf!

    • Em
      Aug 16, 2019 at 10:21 pm

      Very true. I do the same – read all and learn from many!

  22. Anthony
    Aug 16, 2019 at 10:46 am

    My favorite radio commercial of loan refis in 2000s was one with “Biggest no-brainer of mankind”. I always wondered if that referred to the loan or the person getting the loan :)

  23. dziuniek
    Aug 19, 2019 at 10:07 am

    Step 1. Max out your HELOC.
    Step 2. Use proceeds to pay off student loans.
    Step 3. Bankruptcy – where you can discharge other debt.

    Seems like a reasonable workaround for those people with insane student loan debt. (USA)

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