Credit Card Delinquency / HELOC Freeze / Ambac Bailout
A: Ahhhh, nothing like a good bond insurer bailout rumor to save the day for wall street! Funny, how every rally these days is rooted either from a bailout rumor or a fed rate cut rumor; solid stuff! Anyway, I had a conversation with a family friend a week ago who recently LOST HER LINE OF CREDIT on a HELOC, but I didn't put much thought into it until CR's post today. All this stuff really means something and it begs a larger question: If the credit crunch is exactly that, a tightening of credit availability and access to credit, how is that going to allow people to buy buy buy?
First, lets discuss the Ambac rumor very quickly as its 20 hours old news right now. A consortium of banks are reportedly going to announce a cash injection of $2-$3 billion to help Ambac maintain its AAA rating! YAYYYYYY, all our problems are now solved and housing will go up again and all these CDO's and other structured credit products are going to go up in value now! Umm, no! This doesn't solve anything other than delay the inevitable losses from being booked, and will buy Ambac some time until the next round of capital injections becomes necessary to maintain credit ratings again. Its clear the banks have a choice:
1) either team up and cough up capital to hold off a ratings downgrade and book 'X' amount of losses...OR
2) don't do anything, let the insurers get downgraded, and book 'X + X' amount of losses and deal with the negative effect on their corporate stock prices and residual effects that this will bring to overall market sentiment/losses and investor appetite for future risk taking
It's clear #1, the option that has less negative results, is the preferred route and the likely route. In the end, the losses will still be booked and the toxic holdings are still toxic. I look forward to this tentacle of the credit beast being cut off though.
Credit cards! Hey America, you have a spending and credit card problem! No news here. Did we really think this game would go on forever, honestly? According to CardTrak.com, credit card delinquency rates are up 100 basis points in the past 12 months alone; the chart on the right shows this! Our fascination with spending using credit when income doesn't afford the same luxuries is a ticking time bomb when a credit crunch hits home.
Credit card debt WAS securitized on wall street just like subprime mortgage debts were! According to an article from The Center For American Progress:
As borrowing in the mortgage market slows, credit card borrowing is accelerating—a dangerous trend because borrowers still face weak income growth. That means the credit card market could eventually run into the same problems that now afflict the subprime mortgage market.Which brings me to what is really going on in today's world if your head is not in the sand; tightening of available credit! What is it this time? Banks are starting to YANK Home Equity Lines Of Credit! So, lets say you have a $50,000 HELOC, and used $25,000 for home renovations and wanted to use the remaining funds for something else. Well, that available $25,000 is now at risk of being YANKED! According to The Washington Post (via Calculated Risk):The lending industry that no longer aggressively issues subprime mortgages continues to aggressively market credit cards, especially credit cards with subprime-like lending terms, such as a variety of higher fees that are poorly disclosed.
Increased defaults could unravel the $915 billion in securitized debt backed by credit card receivables, just as delinquencies in the housing market unraveled the $900 billion in mortgaged-backed securities. Just like mortgage-backed securities, credit card debt is packaged and sold to investors. An increase in defaults could lead to losses not just for the credit card lenders, but also for pension funds and investors who bought the debt.
Several of the nation's largest lenders, along with smaller ones, are shutting off access to home equity lines in areas where home values are declining. It's an unusually aggressive move as the industry grapples with fallout from the mortgage crisis that began unfolding last year.So, in clear conscious thought, how in the world can anyone possibly start to discuss a recovery when access to credit is being restricted? How much tighter will access to credit get as more losses are booked by banks & brokerages; we know there is more to come? And as credit gets tighter, even tighter than where we are right now, how in the world are consumers supposed to continue leveraged/credit spending?Countrywide Financial, the nation's largest mortgage lender, suspended the home equity lines of 122,000 customers last month after reviewing their property values and outstanding loan balances. The company, like others, has an internal automated appraisal system that tracks values.
USAA Federal Savings Bank froze or reduced credit lines for 15,000 of its customers, including Corazzi, and will not reconsider its decisions until "real estate values improve substantially," the company said in a statement.
Bank of America is starting to do the same and is contacting some borrowers, said Terry Francisco, a bank spokesman.
Add to Newsvine
Comments (9)
Noah,
I apologize if this is off topic, but I just stumbled on your blog while doing a little housing market research and had a question. My wife and I may possibly relocate from Southern California to NYC (Manhattan) or Northern NJ. What is your prediction regarding home values in these areas over the next 2-3 years? I think we should rent for a few years before purcahsing a home. My wife will go along with whatever I decide. I heard Donald Trump state during an interview with Neil Cavuto that home values would probably begin falling in the near future in Manhattan. This concerns me. With my luck the headlines in the NY papers the day after we sign would read "Manhattan Real Estate Crash". Manhattan, and surrounding NJ cities such as Hoboken, have held up well so far. I'm not convinced this will continue to hold true. I appreciate your time in responding to this. Thanks.
Posted by David | February 23, 2008 7:37 PM
David,
I too am from SoCal and have lived in NYC for 7 years in heavily subsidized housing through NYU. We are also looking to buy and Noah's blog has been a great site to follow the market trends. I'm sure Noah will speak for himself but I am willing to bet he will tell you to wait it out, prices will probably go down, and I agree with him 100%.
I've been looking for just over a year and it is hard to find something nicer than our rental. NYC is a totally different beast from CA. I strongly believe, however, if you find a property you like and can afford AND plan to live in for at least 5 years, then you should go for it. I also recommend you rent for a year or 2 to figure out what hoods you like, etc before you buy. Although Manhattan isn't a spread out place (compared to say LA), there are a lot of neighborhoods, some much more desirable than others. There is also a very different culture in terms of real estate compared to CA (for one, co-ops aren't "real property", and most props for sale are co-ops in NYC).
Finally, I do strongly believe it is a good idea to buy in NYC, in the long term, prices will only go up. I think now is actually a good time to buy, interest rates are still historically low (and the conforming loan limit will likely rise for 2008 soon) and buyers seem skittish. Anyway, this is just my impression!
Good luck!
Posted by finchy | February 23, 2008 8:58 PM
Sorry for hijacking the topic, Noah. Wouldn't be here if I wasn't an avid reader, but...
finchy, I'm an NYU adjunct, and haven't found much in the way of their subsidized housing. Where do you suggest I find this information?
Thanks!
Posted by asst prof | February 23, 2008 10:41 PM
Noah, my apologies for getting this thread on the wrong path...
Asst prof: I don't know if adjuncts can get subsidized housing. Housing is super tight at NYU (in fact they would LOVE to get us out of our apt, and there is a very limited financial incentive to do so). I believe housing is given to tenure track full time professors only (both my husband and I are in this category) but I think it is dependent on the department, the chairperson, etc. Your higher up would be the person to speak with. Also check out the NYU housing website through human resources.
Good luck!
Posted by finchy | February 24, 2008 9:16 AM
finchy - thank you for the comment.
Back to the original topic:
"And as credit gets tighter, even tighter than where we are right now, how in the world are consumers supposed to continue leveraged/credit spending?"
Simple, they aren't supposed to. The average American consumer is completely tapped out and is faced with higher prices for many non-discretionary items (food, energy, insurance, etc). The dollar continues to grow weaker and we will continue to import inflation for years to come.
America, now the biggest debtor nation in the world, is overdue for a nice healthy recession.
Posted by David | February 24, 2008 11:32 AM
David,
No worries! I do think Manhattan will see some effect to real estate values, but I do not see a crash by any means. We are deeply rooted to wall street, so when layoffs hit home and the economy is proven to be in recession, you will see lagging effect to housing here via lower sales volume, rising inventory, and some pockets of distress for sellers that must sell fast.
I dont know timing of course. Inventory is trending higher past few months and confidence is down in mindset of buyers, but there is still plenty of buyers out there. It takes time and our inventory is very tight. So, keep an eye on that and economy/stock markets for any insight into how Manhattan real estate will do in response. We have a history of lagging in recessions and leading in recoveries.
Posted by Noah | February 24, 2008 7:32 PM
Here's a good list of things one can do to recover from the freeze: http://www.helocbasics.com/what-to-do-if-youre-hit-by-the-heloc-freeze/
Posted by No Hope Left | March 4, 2008 3:36 PM
www.helocfreeze.com
Posted by James | March 14, 2008 5:51 PM
Can I put a freeze on my credit cards? I have not been charging anything for over three months. I cannot make the payments so they have lowered my line of credit to equal my balance and now I am paying over balance and late fees. Is there a way to stop the fees until I can get back on track? Just wondering.
Posted by Brenda | March 16, 2008 8:40 AM