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The significance of this announcement (and why I am assuming OP posted it), is not to let us know that we can't get home equity lines, but instead showing it as
by jacurtis 6y ago
The significance of this announcement (and why I am assuming OP posted it), is not to let us know that we can't get home equity lines, but instead showing it as a signal that one of the largest mortgage providers in the world is worried about future home/land values.
Remember that Wells Fargo is the 26th largest corporation in the world. They have plenty of money. They have lots of smart people (insert your "stupid banker" joke here) working for them. They have lots of highly-paid analysts that make these decisions. These are not spur-of-the-moment, panic-induced decisions. Wells Fargo also has a lot of experience with home values and mortgages, by being the largest Home Mortgage provider in the US (by dollar value), with $126B in home loans [1].
Long story short, they are experienced in home values and mortgages and they have a lot riding on them. They have smart people that have looked at the current and future state of home values and decided, that despite the potential revenue that could be generated from Home Equity Lines, there is too much risk in offering this product and they will stop offering it until further notice.
That's a big deal. Wells Fargo is leaving lots of money on the table by NOT offering these. But their analysts have decided that it is too risky. That to me, means that there is a lot of concern over future home value. We have been living in a housing bubble for a while. We all know it, Wells Fargo knew it, and this could be a signal that at least Wells Fargo is concerned that the bubble might be popping.
(I personally hate Wells Fargo, but did have a Home Mortgage through them until about 3 months ago when I sold my last home. I wouldn't borrow from them again however. This isn't a fanboy piece, but it is important to acknowledge their strengths when looking at signals like this).
[1] - https://www.housingwire.com/articles/41539-here-are-the-top-10-lenders-dominating-the-mortgage-market/ https://www.housingwire.com/articles/41539-here-are-the-top-...
- tempsy 6y agoIt’s because the government is only buying mortgage backed securities right now for conventional residential loans that don’t include HELOCs which the bank would shoulder all the credit risk for. If the government is guaranteeing one type of residential real estate loan and not the other it makes no sense for a bank to offer the one that isn’t guaranteed when they can just pursue practically risk free lending.
- beerandt 6y agoSame story with jumbos.
- Angostura 6y agoReally appreciate the context, thanks.
- scarface74 6y agoI’m glad to see that a major bank isn’t taking unnecessary risks. Maybe this time won’t be a repeat of what happened in 2008.
- loeg 6y agoI agree that WF has plenty of smart people making these calculations but I'm less attached to the theory that "we have been living in a housing bubble for a while. We all know it." We may absolutely be in for a housing market correction because of COVID's impact on consumer cash flow and its impact on the housing market. Maybe you're just referring to the last handful of months? In that case, I think it's sort of nuanced (we didn't know exactly how long shutdowns would be needed or how significant the impact would be in early February, certainly) but maybe reasonable. I don't believe this supports the idea that there was a bubble prior to COVID (say, February or March 2020 for the US).
- poontang1 6y agoThe massive and steady increase in home value would suggest a bubble, no?
- almost_usual 6y agoI wouldn’t be surprised if some markets were in bubbles and others weren’t. I think there is a lot of speculation about the Bay Area and SF being in a bubble due to high prices. The demand is still there though and it’s actually grown quite a bit in recent weeks ( SF specifically ). Cities with a lot of service and factory workers will see a larger correction.
- loeg 6y agoThis is a more nuanced take and I totally agree. Everything about housing markets is very local.
- arcticbull 6y agoThe Bay Area isn’t in a bubble either, it’s a market whose pricing dynamics are determined by constant strong demand due to economic prospects combined with city councils artificially constraining supply to the benefit of landowners.
- 6y ago
- ttul 6y agoI think it is a big deal for a major bank to state that they are ceasing ALL HELOC origination. That's a gigantic statement of their future expectations on home values. You have to believe that their perception of risk is extreme right now in order for them to make such a move. HELOC lending is profitable: they are giving up profits because they worry about being wiped out.
- loeg 6y agoThe difficulty with things like credit scores is that they are a trailing measure; all consumers are suddenly a much bigger risk than they were in January, even if they've still got a great credit score (based on history). WF is probably concerned that they can't appropriately price the risk, or that the price they'd be comfortable with would be too high to bother (for publicity, for actual business volume, or some other regulatory limit on absolute interest rates).
- ghaff 6y agoObviously a fall in home prices would exacerbate things but, yeah, the main issue would seem to be that there are probably a whole bunch of people with solid credit worthiness in December (and who are still employed) rushing out to get HELOCs so that they have a cushion if things go south. Which is rational behavior for a lot of people given their likelihood of, say, having a job in a couple months time is also less than it was in December.
- xkqd 6y agoI'm a bit late in reading and responding to this, but do you reckon the average person is aware that they can acquire a HELOC as a technique to whether a hypothetical financial storm?
- troydavis 6y ago> instead showing it as a signal that one of the largest mortgage providers in the world is worried about future home/land values. While that's one possible reason for this decision, there are other possible reasons. For example, they may not know how future "payment suspensions" will be handled (https://update.wf.com/coronavirus/home-lending/ https://update.wf.com/coronavirus/home-lending/), may not like it (particularly with HELOCs that they keep on their books, unlike most mortgages), and/or may not want the reputation damage or headache of foreclosing on collateral (even if it would cover the debt). Any of those could completely explain this.
- pge 6y agoI agree - I see this as much more of a comment on consumer credit-worthiness than on home/land values.
- mlthoughts2018 6y ago> “ Remember that Wells Fargo is the 26th largest corporation in the world. They have plenty of money. They have lots of smart people (insert your "stupid banker" joke here) working for them. They have lots of highly-paid analysts that make these decisions. These are not spur-of-the-moment, panic-induced decisions.” This is so comically untrue. Giant companies with forcefields of cash, lobbyists and corporate analysts make stupid panic-based decisions all the time. There are chaotic political battles, unilateral decisions made because one executive had a pouty fit over what another executive did, huge layoffs, price changes, project shutdowns, all based on emotions, political favors, vendettas, etc. It’s the rule. The clean, well-supported decision that came from analysts with statistical rigor is the exception by far. The larger and more bureaucratic the company, the more extremely tilted towards politics it becomes. These decisions are rarely punished by the market due to regulatory capture, bailouts, outright fraud, etc. which essentially occur continually for most large companies with no meaningful consequences, even when these acts are completely overt and public.
- icebraining 6y agoI find your position compelling, but your post would be better with an example of those overt and public acts.
- kasey_junk 6y agoIt’s more likely a recognition of adverse selection in anyone seeking a loan now than a particular opinion about housing values. Under basically no point does Wells Fargo want to foreclose on a house. They will get pennies on the dollar for it independent of macro price differences. So in analyzing risks a 10% increase in foreclosures is going to weigh dramatically more than a 10% decrease in home values.
- bbunix 6y agoThe real concern for the banks is that HELOCs are second lien mortgages, so the risk is considerably higher if there's a default. First lien mortgages get the house. Second lien gets whatever's left over, and guaranteed that the process is painful. Chase did the same thing a while back, for the same reasons.
- ghaff 6y agoI can easily imagine home value risk is one issue. The other is a lot of people whose credit worthiness looks good on paper (for now) rushing to tap into a line of credit "just in case" because they realize their employment prospects could be quite shaky.
- bob33212 6y agoThe combination of a federal mortgage payment vacation, and a 10-20 percentage drop in housing prices could make it attractive to pull out all your equity, stop maintaining the property, stop making payments and get 2 years of free rent before foreclosure.
- elliekelly 6y agoIf this decision were based on projections/fears about property values they would cease or dramatically cut back all loans secured by real estate. I think this decision is driven more by projections on (1) the average borrower’s ability to repay given the swift and dramatic economic changes, (2) uncertainty around legislative changes that might temporarily make the terms of these and other loans less favorable to banks, and to a lesser degree (3) the pecking order for HELOCs in the event of foreclosure. Italy suspended mortgage payments during their lockdown and (correctly, IMO) forced banks to bear some of the financial burden of the economy grinding to a halt. It’s certainly less likely for the US to pass a similar measure but it’s entirely possible that banks could be required to do significantly more “rehabilitation” on defaulted home loans than they have in the past. That’s an expensive undertaking for a bank even in the best of economic times.
- bladegash 6y agoI think your third point kind of supports the idea that banks are concerned about future property values. HELOCs are typically junior liens, and in the case of a property that loses its equity, essentially unsecured debt. If they aren’t concerned about property values decreasing, then presumably they would be confident they’d recuperate the lended amount through the foreclosure. If the property is underwater that is unlikely to be the case.
- CPLX 6y agoI think you’re missing the mark slightly by focusing on housing prices alone. There are two other key variables here. One is incomes. It’s quite plausible that defaults in a year or three will turn out to be extremely uncorrelated with today’s credit scores. The second one is interest rates, which are spectacularly low. Those two things combined make it very hard to predict how much profit a line of credit type product will be able to produce.
- Zenst 6y ago> Remember that Wells Fargo is the 26th largest corporation in the world. They have plenty of money. They have lots of smart people (insert your "stupid banker" joke here) working for them. I remembered this: https://www.theguardian.com/business/us-money-blog/2016/oct/07/wells-fargo-banking-scandal-financial-crisis https://www.theguardian.com/business/us-money-blog/2016/oct/... "disclosed that it would fork over $185m in penalties to regulators after an audit discovered that employees opened as many as 2m deposit and credit accounts in customers’ names but without their consent" But do agree, however much of the market is driven by such actions and if they are right or wrong, their move will make it more inclined to happen than had they made no such move. Which is an aspect that plays out in many financial markets in various forms.
- bsanr 6y agoThis too: https://news.ycombinator.com/item?id=23053272 https://news.ycombinator.com/item?id=23053272
- bsanr 6y agoDidn't they lose a pretty significant suit because their salespeople were denying mortgages or significantly adjusting their offered terms to black people based on their race? I'm not convinced that their strategy is necessarily sound and unbiased or representative of the knowledge base they command. EDIT: My apologies, I was mistaken. They settled for $175 million. You can remove your downvotes now. https://www.startribune.com/wells-fargo-pays-175-million-in-bias-case/162224505/ https://www.startribune.com/wells-fargo-pays-175-million-in-... https://consumerist.com/5283290/affidavits-on-how-wells-fargo-gave--ghetto-loans-to-mud-people.html https://consumerist.com/5283290/affidavits-on-how-wells-farg...
- ISL 6y agoI don't see this as a direct bet against home values, but rather a bet against employment and on turmoil. WF may be seeing tons of applications for home equity lines in order to backstop failing households. If they're not sure that they'll get paid back, then WF won't want to make the loan. I once was involved with corporate loan negotiations where the lender could have easily taken the borrower up on a proffered deal, but the fate of the borrower's company would have been sealed on the day the loan was signed. The terms were such that the borrower's odds of being able to repay the loan were <10% and the collateral requirements were at least twice the loan amount. The lender would have roughly doubled their money at the expense of a headache, but chose to walk away instead. The borrower would have taken the deal at almost any price. In the lender's words, "We're in the loan business, we want to make loans where people can pay interest." My thank-you letter to the lender for walking away was one of the first they'd ever received.
- omgwtfbyobbq 6y agoThey may also lack confidence in their ability to foreclose on homes with delinquent HELOCs.
- RhysU 6y agoAnd the resale value of the foreclosed home would be lower too. Good collateral is important.
- anoncareer0212 6y agoI can't parse from this why you'd turn down a 100% return - it sounds like the implication is the headache of collecting is too annoying, but that's not a very rational approach
- ISL 6y agoI think there were three reasons: 1) The loan officers were good people, with the borrowers' best interest in mind. 2) The headache would have been substantial. 3) They really are in the loan business, not the foreclosure business.
- bo1024 6y agoCould this just be a political power play to pressure the US gov not to pass any mortgage forbearance, forgiveness, or similar measures?
- twblalock 6y ago> We have been living in a housing bubble for a while. We all know it, Wells Fargo knew it, and this could be a signal that at least Wells Fargo is concerned that the bubble might be popping. I really doubt that. Home values are high in urban areas because of high demand and low supply. The buyers are actually qualified and can afford to pay their mortgages. Mortgages are not being handed out like candy like they were in 2008. Right now the situation is kind of the inverse of 2008. In 2008, a recession triggered mass job loss. Today, mass job loss resulting from the virus lockdowns has triggered a recession. No bubble burst. I would bet Wells Fargo is more worried about people who are otherwise creditworthy suddenly being unable to make payments because they lost their jobs, or the government suspending payments. In a situation like this, credit history is not very useful in evaluating risk.
- neosat 6y ago"In 2008, a recession triggered mass job loss. Today, mass job loss resulting from the virus lockdowns has triggered a recession" While what triggered this is different, because one has a direct impact on the other the OP is still right about the housing bubble IMO. Trigger (virus) --> mass job layoff in directly affected industries (e.g. travel) --> recession --> more job losses in second order affected industries (e.g. advertising, food supply) etc. ... --> ultimately impacting asset prices like houses which grew too much too fast
- chx 6y ago> by being the largest Home Mortgage provider in the US (by dollar value), with $126B in home loans May I mention how absolutely insane is the richest person has more wealth than that?
- __blockcipher__ 6y agoWhy do you consider that insane? It seems bizarre to view inequality as inherently bad, as opposed to a more moderate view that inequality due to government-sponsored monopolies or from influencing politicians to make absurdly favorable deals in exchange for personal kickbacks, etc is bad.
- CydeWeys 6y agoThat extreme inequality is inherently bad is not a "bizarre" view. It's a very common one. You're living in a filter bubble if you think otherwise.
- perl4ever 6y agoWhy should "bizarre" views necessarily be uncommon? I think you're assuming a definition of the word based solely on frequency and the other person is not.
- CydeWeys 6y agoYou're not approaching a discussion in an honest, open-minded way if your opener is that the opposing widely-held viewpoint is "bizarre". It's not worth engaging with people who argue like that, because they're demonstrating at the outset that they can't be reasoned with and are condescendingly dismissive of other people's viewpoints. It's not the frame to start a discussion with at all; it's just getting in a cheap shot. Saying a view is "bizarre" is not valid argumentation anyway; it makes no substantive counterclaims. It's just subjective name-calling.
- perl4ever 6y ago
- dwighttk 6y agoWouldn't that sort of bet against home values include pausing new mortgages as well? This signal may be something else.
- greglindahl 6y agoConforming mortgages get a federal guarantee.
- tootie 6y agoNah. They're still issuing mortgages and refis. HELOCs are specifically for home improvement or other cash infusion. HELOCs have been going out of style for a while. Borrowers have considered them risky since the last recession, so the market has narrowed to less attractive customers.
- tempsy 6y agoYeah it’s basically a huge personal loan. Wouldn’t put them in the same category as mortgages at all.
- perl4ever 6y agoIt's variable rate, but it's not necessarily as restricted as is being implied. And you can have, say, an interest only period for 10 years and then a 15 year period to pay back, which is not that different from a 30 year mortgage.
- brightball 6y agoHELOC is the one type of loan that I tell everyone to get the moment you can. After the crisis in 2008 we found that, when you NEED a loan...you can’t get one. The only thing that got us through was that we already had an equity line open and once open, it’s just like a low interest credit card. You don’t pay anything for it if it’s not being used but having it available provides a big emergency buffer. It’s the primary reason I tell everyone to put down 20% on your home because as soon as you do that, you don’t pay PMI and you qualify for HELOC.
- SilasX 6y agoReally? I'm confused. I would think that they could rescind the offer to draw on it for the same reason they would pull back on making home equity loans. And why wouldn't they? Not saying you're wrong, it's just I don't see what kind of dynamics would lead to that kind of thing, where the economic situation drastically changes to the point where they won't make new HE loans but will gladly honor anyone's exercise of an existing HELOC on (mostly) the same terms they had before. I could understand if HELOC approval locked in some duration under which the bank couldn't back out, but I don't see why banks would grant such optionality either.
- bladegash 6y agoAnecdotally, I had a $50k HELOC on a property once. I wanted to avoid something happening like the bank being able to freeze withdrawals from the account. So, I withdrew all of the money from the HELOC and put it into a personal account. The interest rate was around 2.75%, so I was only paying around $100-150 per month. It was a huge lifesaver when I was in a tough situation.
- brightball 6y agoHELOC's tend to have a time period attached to them of something like 10 years that you can draw from it before you apply for another one. I haven't heard of banks closing an open equity line before though.
- SilasX 6y ago
- commandlinefan 6y agoAlthough, somehow, I’ll bet my property taxes will stay the same.
- walrus01 6y ago> They have plenty of money. They have lots of smart people (insert your "stupid banker" joke here) working for them. They have lots of highly-paid analysts that make these decisions. People also said the same thing about Washington Mutual. And about Bear Stearns. https://en.wikipedia.org/wiki/Washington_Mutual https://en.wikipedia.org/wiki/Washington_Mutual
- perl4ever 6y agoWells Fargo probably has no confidence in their ability to judge whose job is secure right now. Some lenders might be making loans because they have some specific knowledge. I think home values are not the point, and all real estate is local, so there is no national bubble. People just want to babble about bubbles because that's all they learned from 2008 is to repeat the word. Or they live in some crazy place like SF or Vancouver.