A local heads-up from Julian Hebron at RPM Mortgage:
Be advised that most banks and lenders nationwide have begun freezing Home Equity Line of Credit 2nd mortgages. Even borrowers with significant equity and perfect credit have been receiving HELOC freeze letters. In many cases, it’s not about borrower creditworthiness but rather the institutions shoring up their balance sheets. The reserve requirements banks need for open lines of credit are significant, and with mass losses reported by nearly all major financial institutions over the past 2 quarters, the strategy to freeze HELOCs is a quick way for them to gain some footing.
Uh, Oh! No more money from the house ATM. Wonder what that does to consumer spending? Things aren’t going to be pretty this year.
Banks are shoring up capital, but it won’t matter. The money’s gone, because all along the “money” was just credit, and it’s not going to be repaid. Bernanke could operate the presses 24/7 for a year and he will not be able to replace the money/credit that is being destroyed. Japan printed 10-15% of GDP (on a %GDP basis, equivalent to our entire monetary base) every year in the early 2000s, and it didn’t make a bit of difference. Credit deflation is a nasty business.
About banks being out of money, take a look at the latest H3 reserve figures, straight from the horse’s mouth (or I guess, a$$, in this case):
http://www.federalreserve.gov/releases/h3/Current/
Look at “non-borrowed” reserves in the tables, and look at the collapse. There are other things going on here – principally the fact that the Fed in lending reserves at low rates and anonymously through the TAF facility – but I think the banks are out of cash. Plain and simple. Just my (informed) opinion. Not good.
Quite frankly, I was hoping someone like Satchel would look at the H3 numbers and tell us why we shouldn’t be panicing. Instead, all I have is a reassurance from the Fed that the negative level of nonborrowed reserves is an arithmetic result of the fact that TAF borrowings are larger than total reserves.
http://www.federalreserve.gov/feeds/h3.html
My gut keeps telling me that the “borrowed reserves” are a result of “deleveraging” in the fractional reserve system when a heck of a lot of money disappears overnight (read: housing bubble equity goes poof and the subsequent banks losses begin to affect the reserves). Any guesses as to what is in store next? Here are some possiblities:
1. TAF2 with loosened collateral requirements.
2. Implicit GSE backing becomes explicit (or the gov’t recapitalizes the GSEs for jumbo mania).
I’m baffled when public agencies with taxing authority can’t sell their auction rate bonds – and some end up at rates of 20%. Investors are just totally avoiding security types in the credit market without separating the crap from the good. Strange days..
All in good time, EBGuy. I think you will see variations on everything you posited. However, the Fed and the USG are penned in by the FCBs and the forex markets. They will slow down the adjustment in housing values (and perhaps equity and other asset values as well) but they will not be able to stop it. Any massive recapitalization or transfer of bad debt to the USG will raise interest rates too high, and too fast, and it would collapse the highly leveraged economy anyway. The adjustment must be stretched out, and the population must be forced to absorb as much of the loss as possible, whether through decreased asset values, increased taxation, some inflation (consistent, though, with the need to not spook lenders such that rates rise), or a combination of all three.
I do not think it was accidental at all that Bernanke (one of the primary experts on the Great Depression) was installed in early 2006, and that he immediately embarked on a path of shrinking the monetary base (or at least restraining growth in the base to below price inflation). They want a managed deflation, just as they did in the late 1920s. They are hoping its effects can be moderated, and not result in a 1930s-style event, but their success in this endeavor will depend much on the politicians. I am actually a little hopeful that they will suceed, if only because today there is not even any pretense that the politicians are controlled completely by the banks, and the population today is as out to lunch and clueless as they ever were….
“pretense that the politicians are NOT controlled by the banks”
Sorry, that no preview function again…..
That a HELOC could lead to personal ruin was always a fairly clear risk, but the possibility of taking down the whole bank that way never occurred to me before this bust.
at least restraining growth in the base to below price inflation
Okay, this is a sublety I missed — now I can at least start taking long slow breaths and remove the paper bag. The spectacle I was focusing on is that the SOMA accounts were drawn down about $40 billion last year, but most of that went out the door through TAF (and to a lesser extent, with Repos). See
http://www.ny.frb.org/markets/omo/omo2007.pdf
I guess the key is most, but not all, as you point out the monetary base is somewhat flat. Still, I find “borrowed required reserves” very disturbing (where is that paper bag).
Satchel – given your analysis, where does one invest and where does one avoid investing?
Re: H3/non-borrowed reserves, a picture is worth a thousand words:
http://www.chartmechanic.com/builder/rest/charts/3512
Yikes! Talk about cliff diving.
I saw that chart on p.16 on the SOMA account! Don’t worry, keep breathing slow EBGuy. The Fed and the USG are totally in control here, at last for now. However, the result is not going to be what homeowners expect (hope for). There will be some serious asset deflation – I just don’t see any other outcome. Inflating away means an instant adjustment in the current account, as the overseas money disappears. We don’t want an Indonesia 1997 or Russia 1998 on these shores!
@Mole Man – HELOCs and (by extension) foolish lending to inflate US housing prices could take down not only a bank, but the economy generally. From 2000 through 2006 (end data), the US increased debt secured by residential assets by about $6 trillion, at the very least. That is about 40% of GDP, to add to the 40% of GDP already represented by lending on nonproductive assets (i.e., people’s homes). Here’s the problem. 80% of GDP debt on nonproductive assets requires some positive real return, which must be paid out of income derived from productive things (like jobs or factories). Say the required real rate averages 3% (that’s probably a low estimate). That means that the population must divert 2.4% of GDP in REAL TERMS just to SERVICE the debt (let alone pay it back). The problem is that the economy can only generate 3-4% MAX real growth per year. Once you pay the required return on the nonproductive asset debt, you’ve gone through almost all your growth. Where does the money come from to pay real returns on the rest of the aggregate debt (wich is about 3-4 TIMES what the mortgage debt is)?
Money will have to be diverted out of income, and living standards will fall, perhaps dramatically. We avoided this post-2000 by pushing debt into residential real estate, plugging the hole that would have resulted had we been forced to deleverage then. IMO, people expecting that the USG can inflate its way out of this do not understand the dynamics. Once we have reduced debt levels, then the USG will be free to inflate again, and I am sure that it will. But that is a few years’ off, at the earliest. Buying real estate after the coming adjustment will be a winning bet IMO, but remember Buffett’s dictum “money flows from the impatient to the patient” (someone could correct me here – just going from memory).
I decided that the world of finance has gone to hell in a handbasket. We’ve been trying to get a HELOC or a construction loan for a major remodel on our place and every week something new comes up. The construction loan divisions are getting shut down, the HELOC people say one thing, then another (sure we’ll lend you X, then 70% of X, then 50% of X). It’s just a little crazy IMHO because we are doing the financially conservative thing – remodeling instead of buying something for the remodel is just all wonky but we can buy a place with no problem. I just hope it’s settled by the time we start construction since our place is feeling really really cramped right now!
“Money will have to be diverted out of income, and living standards will fall, perhaps dramatically.”
Ha ha, you are assuming people are actually going to pay that money back!
What happens if the opposite is true. Homeowner A sells his home for 8x what he paid for it, and takes the cash. Homeowner B borrows money from foreigner C and hands it to homeowner A. Then, homeowner B defaults and walks away. Foreigner C sells the home at a loss to homeowner D, for 2X what homeowner A paid for it.
Homeowner A lives large, Homeowner B goes back to renting and Homeowner D lives in a reasonably priced home making payments he can afford. Sounds like happy ever after to me! Unless you live with foreigner C. His economy goes to hell…
Speaking of foreigner C, the infamoous chart on page 16 shows a program of Currency Swaps (with the European Central and Swiss National Banks) started up at the same time as TAF. Well, the Norwegians were always an austere lot anyway…
BTW, congrats to Socketsite! I think you may have scooped everyone on this one (which is hard to do in the Internet Age). All the other sites are talking about LTV and managing risk. This is not about risk management; it is about the wheels of the machine seizing up. I guess time will tell if reserve requirements are the real story concerning frozen HELOCs. I can’t find anyone else discussing this in the blogosphere. Anyone?
“Ha ha, you are assuming people are actually going to pay that money back!:
LOL Tipster! You’re probably right! But, seriously, the debt overhang is more than just HELOCs of course. There’s corporates, household debt other than mortgages, government debt, CRE, etc. Much will be destroyed, and our friends in Beijing, Tokyo and Zurich will sit down to a large feast of merde baguette, of that you can be sure.
But some will have to be repaid, if only to keep the debt wheel flowing. You can’t expect the US to suddenly live FULLY within its means all at once, do you? (That would be instant Depression, as the contraction necessary to swing a -6% current account deficit, coupled with a -2% budget deficit, would be a thing of wonder! It would make 1931 would like a walk in the park, and even give Russi 1999 a run for its money!)
Some of this we’ll pay back, out of AGGREGATE income. That means the homemoaners will be encouraged to pay as long as possible on depreciating assets – hello bailouts, Hope Now, Project Lifeline (“wanted: debtor alive” – I love that phrase I read somewhere), etc. – and the rest will be paid by the productive citizens of this country like you and me through taxation. Oh well….
Outstanding macro-discussion of the U.S.S. Creditcrisis.
The next event, in my opinion, is the final down grade of the monolines, and another subsequent and necessary markdown on associated collateral. Perhaps even as soon as this week. the bailout plan being batted will have as few legs as Paulson’s aborted “SIV Plan.”
Good & short podcast at “Bloomberg on the Economy” on the imminent contraction of all forms of credit by David Goldman dated 2/14/08. He argues that many corporations have been pulling down lines of credit previously contracted at a very high, and unsustainable rate, because a lot of smart players understand that available lines are going to become extremely scarce. The banks balance sheets are in shambles – we are entering a period when those who need a loan won’t be able to get one, and those who can won’t want one.
America is awakening to the fact that a leveraged asset is also an enormous liability…..
I’ve seen references to HELOCs being frozen “in declining markets”.
Has anyone heard of this happening to a home in SF?
Uh…oh…
“U.K. Treasury has decided to nationalize troubled mortgage lender Northern Rock”
The bailout has begun!
If your HELOC or home equity line of credit was frozen, suspended or reduced by your mortgage lender or bank, you could try contacting class action attorneys investigating HELOC freezes:
http://www.classactionconnect.com/?q=node/751
You can also share your home equity line of credit or HELOC complaints with other HELOC borrowers whose HELOCs were frozen:
http://heloc-complaints.com/
If your HELOC or home equity line of credit was frozen, suspended or reduced by your mortgage lender or bank, you could try contacting class action attorneys investigating HELOC freezes:
SCAM alert! I suggest you go back to chasing ambulances.