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Consumers have been living beyond their means for a long time. The three primary ways to do this have been cash out refis, credit cards, and home equity lines of credit (HELOCs).
In Love Affair With Credit Cards Is On The Rocks we noted how Bank of America (BAC) and other lenders have raised interest rates on credit cards out of fear of rising defaults.
Citigroup (C) put a Strange New Definition On "High Risk" by canceling customers who actually paid their bills on time.
In regards to Home Equity Lines, Countrywide And Chase Shut Off The Cash Spigot. Now, the Washington Post is noting that Bank of America (BAC) and USAA Federal Savings Bank are following suit.
Let's review the Washington Post story Homeowners Losing Equity Lines.
In one brief phone call, Nancy Corazzi's lender yanked away what was left of the $95,000 home equity line of credit that she and her husband took out five months ago. The lender informed her that her Howard County home had plummeted in value and the company did not want the risk that she would owe more than the house was worth. "I got off the phone and I was shaking," said Corazzi, who was using the money to pay preschool tuition for her twins ."I was near tears. We needed this credit line to get us through some tough times."My Comment: If this is a typical reaction, and it might be, many consumers are still in denial. Home prices are not going up and attempting to meet ordinary expenses by tapping lines is not going to work.
"Nearly all the top home equity lenders I know of are doing this or considering doing this," said Joe Belew, president of the Consumer Bankers Association, which represents some of the nation's largest home equity lenders. "They are all looking at how to protect themselves as real estate values go down, and it's just not good for the borrowers to get so overextended."My Comment: Lending restrictions have tightened dramatically, across the board. Banks are trying (and failing), to prevent ballooning balance sheets. One reason they are failing is that the pace of "walk aways" is increasing. Many homeowners are not even waiting a full 90 days delinquent before turning over the keys.
- 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.
- 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
In case you missed it, please take a look at Evidence of "Walking Away" Found In WaMu Mortgage Pool posted last weekend.
As stunning as it might seem, a Washington Mutual (WM) Alt-A mortgage pool created in May 2007, 92.6% rated AAA is now 15% in foreclosure or REO status, after a mere 8 months. See the above link for details.
Banks are clearly spooked by this trend and are blatantly asking Congress for bailouts. Inquiring minds may wish to consider the "moral hazard" of Bank of America Asking Congress for a $739 Billion Bank Bailout.
Returning to the Washington Post article...
Maggie DelGallo did not realize that when she took out a home equity line a few years ago on her home in Loudoun County. Her lender recently froze the line.My Comment: Attitudes like DelGallo's give banks all the more reason to shut down lines of credit. The point of an equity credit line is to tap equity. DelGallo is proposing tapping non-equity as if that was some God-given right.
DelGallo, a real estate broker, has used some of her credit line over the years. Had she known the freeze was coming, "I would have drained it," she said. "I would have taken every dime and possibly placed it in a money-market vehicle."
DelGallo said she does not think she is in dire straits. "It's more like a huge disappointment," she said. "I have this line of credit attached to my home that's useless."
By showing willingness to borrow money at 8.5% or so, and putting it in the bank at 3% or so, DelGallo has proven the willingness to get into "dire straits" even if she is not there now. Banks reading the Washington Post article like likely to become even more spooked.
Five months ago, the [Corazzi's] Ellicott City house was appraised at $560,000; the lender says it is now worth $469,100.My Comment: This is a clear case of denial, not understanding the law, not understanding the housing market, and refusal to live within one's means.
"I told them, 'You guys are wrong,' " Nancy Corazzi said. "They said, 'Sorry, this is what we're doing in the entire area.' "
Corazzi said she was blindsided by what's happened. "I didn't know they could do that. I thought I was too smart to have something like this happen to me."
Like it or not, both DelGallo and Corazzi will be forced by the market to live within their means. Should they refuse, they will go bankrupt. It's that simple. Hundreds of thousands of others may be forced to make a similar choice.
Do Social Moods Drive Action?
Clearly the attitudes of DelGallo and Corazzi did not change, at least on their own accord. Some no doubt will look at that as evidence that social attitudes do not drive action.
Before we go further, let's recap "Social Mood Darkens", point 5 of Professor Depew's "Five Things" on How It's Gonna End.
According to Professor Depew, "Social mood drives social action, not the other way around. Cautious people cause home prices to plunge. Cautious businessmen cause credit to tighten. Fearful people suddenly view debt as harmful, not helpful."
Clever readers will quickly see why Professor Depew's socioeconomic thesis is indeed correct. In this case, cautious (even fearful) bankers are tightening credit. Why? Because it all started with cautious consumers refusing to play the greater fool's game with home prices. The attitude change by consumers caused an attitude change by banks. The attitude change by banks will cause a souring attitude in those who were still in denial and still willing to party.
And so the cycle feeds on itself, and will continue to do so until it reaches an extreme in caution and fear.
Attitudes are like pendulums. Momentum carries both pendulums and attitudes to extremes. The pendulum of consumer recklessness has now reversed, having recently reached a secular peak. It will not stop at equilibrium on the way down. Instead, momentum will progress to a point of complete exhaustion marked by cautious saving instead of reckless spending.
The attitudes of DelGallo and Corazzi from the Washington Post article just may be an indication of how much more attitudes need to change before things bottom. We are a longs ways off in terms of both time and price.
Mike "Mish" Shedlock
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