Mortgage

Will HELOCs and nonbank lending contribute to another housing bubble?

This isn't homeowner confidence, it's madness

It is difficult sometimes to keep from sounding like a nattering nabob of negativity when writing about current and potential trends in the economy in general and the housing market in particular.

But some things jump out at me when presented in a positive manner, but just below the surface (spin), are exposed as something else.

I rarely hesitate to comment when this happens.

In a recent article appearing in HousingWire, “Credit Nation? HELOCs up 20.6% year-over-year,” written by senior financial Reporter, Trey Garrison, focus appears to be on how the increase in home equity lines of credit is a positive sign regarding the housing “recovery.”

While that may seem true to people, say those who believe the CDC is also telling the American people the truth about the potential spread of Ebola in our country, to me the number of homeowners getting HELOCs signals that many who have seen some return of equity to their home may be tapping into it to offset higher costs and stagnant wages, or even loss of income. This would not necessarily be a wonderful thing.

In his piece, Garrison quotes Daren Blomquist, vice president of RealtyTrac, as stating, “This recent rise in HELOC originations indicates that an increasing number of homeowners are gaining confidence in the strength of the housing recovery, and more importantly, have regained much of their home equity lost during the housing crisis.”

While that may be true in many cases, I would point to still higher than reported unemployment and underemployment numbers and ample reports about middle-class stagnant wages as another reason for increased HELOC activity.

HELOCs played a significant role in blowing up the housing bubble to an unsustainable size. In addition to refinancing their first mortgages, taking out second and third mortgages, HELOCs made it easy for far too many homeowners to use their equity as a kind of ATM to purchase vehicles, boats, vacations, investment properties, even to start their own business, and so forth, as home prices rose beyond real property “values.”

In most areas of the country an apples-to-apples comparison of home equity increases have not occurred, which could mean the problem is not going to be as bad as before. But the desire to pay off debt, offset lower or even lost wages, or just keep ahead of inflation could cause another credit/housing bubble.

Smaller than the last one, perhaps, but to those who could be trapping themselves with future debt it will seem no less tragic.

Add to this the concerns raised recently by J.P. Morgan Chase CEO, Jamie Dimon that nonbanks represent a new threat to our nation’s financial stability and one would think that a story reporting on increased activity in HELOCs would portend bad things are ahead. However, for whatever reason or reasons, the focus of many housing-related stories is on the positive.

But I digress.

While at the Institute of International Finance Membership meeting in Washington, D.C. recently, as also reported in HousingWire, Dimon said that there isn’t a lot that will keep the U.S. economy down. But when asked what keeps him awake at night, he said, according to CNBC, that nonbank lending poses a danger, “because no one is paying attention to it.” Dimon also went on to say that the “system,” meaning nonbanks, is “huge” and “growing,” suggesting this is not a good thing.

After saying this, Dimon reportedly also mentioned, “I’m a real long-term bull on the U.S. economy” (Maybe he added that so he too did not totally come off as a nattering nabob of, well, you get it).

Just as HELCOCs were a contributing factor to the housing crash, so too was nonbank lending, as many such firms so often made low-quality loans to many borrowers who were incapable of or did not choose to pay for, which caused a plethora of defaults.

These are just two factors threatening to halt what little momentum some believe there is with respect to the housing “recovery.”

The truth may be that the recovery really has been, as I have been saying, illusory after all.

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