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Wednesday, February 13, 2013

Homeowners Using Their Homes Like ATMs Again?

The securitization of mortgages was viewed by many, including the Fed, as way to spreading risk, increasing loan demand and profits, and supporting underlying asset prices. Real estate loan demand and home prices soared when securitization offered credit to the millions once considered too risky.  It didn't take long for homeowners to realize they could covert the unexpected bounty of rising equity into cash.  This CDO-driven virtuous cycle was viewed by many as the long sought perpetual motion machine of modern finance.

A smart few, however, realized that while this machine spread risk, it's massive profit potential, driven by greed, would also discarding the principles of sound finance. As the CDO pile grew, the quality of loans written declined dramatically.  The same endearing property that spread risk across the financial system also dangerously interconnected it as the debt pile grew beyond even the scope of imagination.  Soon a single economic "shock", risking only the failing institution(s) before the advent of the CDOs, would threatened the entire global financial system.  The failure of Lehman brothers in 2008 was the public first view of the dark side of CDOs.

Since the dark side of CDO was never fully addressed in the light of day of listed exchanges - only swept under the rug by timely accounting 'flexibilities', any indication that Americans are once again using their homes like ATMs would be development.  My research does confirm this home equity uptick, but due to its importance, I am watching the trends below closely (chart 1&2).

Chart 1: Home Equity Loans 12-Month Change (HE12LN) And Percentage of Total Bank Credit (%TBC)

Chart 2:  Real Estate Loans 12-Month Change (RE12LN) And Percentage of Total Bank Credit (%TBC)

Headline: Americans Are Tapping into Home Equity Again

Nearly 11 million borrowers are underwater on their mortgages, owing more than their homes are worth, according to CoreLogic, and yet home equity lines of credit are suddenly on the rise again.

During the housing boom of the last decade Americans withdrew over $1 trillion in home equity. They did it through cash-out refinances, home equity loans, and home equity lines of credit. The latter allowed them to use their homes like an ATM. They spent the money on cars, televisions, vacations and fancy home upgrades. It was seemingly endless equity, until suddenly that equity was gone.

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