Saturday, May 17, 2008

HELOCs: There's Something Happening Here

by Calculated Risk on 5/17/2008 06:06:00 PM

I've reviewed a copy of a memo from Sun Trust concerning HELOCs (Home Equity Line of Credit) that I believe to be authentic. In the memo, dated yesterday, Sun Trust announced new HTLTV ("HELOC Total Loan To Value") restrictions in certain circumstances (like declining markets, new condominiums, 2nd homes), and they are apparently even eliminating their Flex Equity program completely in several key states (like Arizona, California and Nevada).

This is nothing new. A number of banks have announced HELOC restrictions this year, see Chase: Max HELOC LTV 70% in Certain Areas

Note: HousingWire has been covering the HELOC news extensively: Focus shifts to HELOCs

Bill Fleckenstein also wrote about HELOCs in his Daily Rap on Thursday (with comments from his source the "Lord of the Dark Matter). For more excerpts, see: Fleck: HELOCs: The New Subprime

"A couple of us tuned into Dexia's conference call yesterday, looking for clues on HELOCs. We got plenty, and they were important. In February Dexia said the absolute worse case loss for their monoline subsidiary FSA was going to be $125 million. Yesterday, they added $195 million to that. The reason given on the conference call for the poor guidance is that the servicer on their wrapped HELOC portfolio, Countrywide, had such a backlog that FSA didn't get the news that delinquencies were skyrocketing until very recently."
excerpted with permission, emphasis added
Is this really the reason FSA (and BofA) provided poor guidance recently ... servicer delays?

Perhaps something more fundamental is happening. What if certain HELOC borrowers were using the HELOCs as ATMs, paying their HELOC (and first lien) monthly payments using borrowed money? Yes, a different bred of NegAm loans! Then, when the lenders started to rescind or reduce these HELOCs earlier this year, many of these Home ATM junkies were stuck without a fix.

Then - if this story is correct - as the Home ATM junkies have started to default, the lenders have discovered that their secured lines of credit were really unsecured (there was no "HE" in the "HELOC") - and the lenders' losses on home-equity loans started to rise rapidly. This seems more likely to me than "servicer delays".

For more on HELOCs, I recommend Tanta's HELOC Nonsense, The HELOC As Disability Insurance and Banks Freezing HELOCs.