Renewed weakness in the U.S. housing market is being compounded by an overlooked problem — the straitjacket of home-equity loans and “cash-out” re-financings that may be putting millions of more homeowners under water than usually estimated.
According to Advisor Perspectives, second liens in the form of home-equity loans (HELOCs) are not always taken into account in calculations of how many homes are worth less than the outstanding debt their owners have taken out.
During the bubble years of 2005-2007 alone, HELOCs “were doled out to nearly any homeowner who was breathing,” totaling 10.8 million loans,
Advisor Perspective contributor Keith Jurow, a real estate analyst, said.
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“These HELOCs will be resetting into fully amortizing loans over the next 3½ years. Monthly payments on resetting HELOCs could double or triple. This reset will come as a real shock to these homeowners.”
Separately from HELOCs, he noted Wall Street has paid almost no attention to the refinancing “lunacy” that occurred during the key years 2003-2006, although it may also help explain why the housing market is still weak.
“As rampant speculation fueled the housing bubble, homeowners were watching the value of their homes soar. The temptation to pull some of the growing equity out of their house through ‘cash-out’ refinancing was irresistible,” Jurow wrote.
Freddie Mac calculated that about $146 billion was pulled out in "cash-out refis" during 2003 alone. In 2004-2007, U.S. homeowners tapped the equity in their home by pulling out an estimated $962 billion by refinancing.
“These are truly incredible numbers,” Jurow said. “Millions of homeowners who had purchased prior to 2001 simply refinanced either their first mortgage or second lien and ended up with a much larger total debt on their home.”
Bloomberg News reported the punkish housing recovery has “surprised and concerned Federal Reserve Chair Janet Yellen and her colleagues at the central bank,” but there may not be much they can do to solve it.
The Fed can influence mortgage rates through monetary policy, but it cannot attack other causes of weak demand such shrinking household formation, tight lenders and cautious borrowers, Bloomberg noted.
A recent decline in mortgage rates isn’t “going to have a terribly big impact” on demand because rates are likely to rise again as the economy strengthens, according to Mike Fratantoni, chief economist for the Mortgage Bankers Association.
The Christian Science Monitor took a slightly more optimistic view of the American housing market.
Homes aren't in over-priced territory in most markets, there is not a nationwide over-supply of unsold homes, and recent U.S. housing starts show an uptick,
the Monitor noted.
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