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I 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
by ISL 7y ago
I 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 7y agoThey may also lack confidence in their ability to foreclose on homes with delinquent HELOCs.
- RhysU 7y agoAnd the resale value of the foreclosed home would be lower too. Good collateral is important.
- anoncareer0212 7y 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 7y 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.
- Optimal_Persona 7y ago4) They couldn't see a way to make money by fraudulently opening millions of fake accounts in the process.
- ISL 7y agoI was in the room. 4) wasn't a factor. The loan officers were trying hard to understand how the proffered deal wouldn't kill the borrower's company. If I ever need a loan that falls into their scope, I'm calling them first.
- ashtonkem 7y agoIn one case, WF cared about the customer. Given that they literally got caught perpetuating one of the largest consumer banking frauds in human history, forgive me if I don’t trust them to do the right thing consistently.
- jhayward 7y agoI think the question is one of ethics or morals, and not predation.
- caseysoftware 7y agoPotentially two reasons: - First is the moral/ethical reason - it doesn't matter your religion or lack thereof, causing someone to crash and burn, causing unemployment, and generally ruining lives is bad. - Second is their business. Banks are in the lending business. Unless the collateral was cash or stocks (unlikely based on explanation), they'd have to figure out how to repossess and then dispose of the assets. Yes, they probably have a group that handles that sort of thing but you're introducing unnecessary headaches. Either way, walking away sounds like the right and good call.
- nostrademons 7y agoThere's also risk involved in taking possession of collateral. If you've written a loan such that collateral is 2x the loan amount, but then all potential buyers of the collateral fall on similar hard times such that you have to sell it at 10 cents on the dollar, then you've still lost 80% of your loan value. Prices aren't static, and they reflect what's going on in the market at any given moment. If the market basically evaporates right as your loan comes due, then the value of your collateral isn't what it was when the loan was written, it was what it is when the loan defaults.
- caseysoftware 7y agoGood point. I bet that "prime retail space" in January is looking more like a liability than an asset right now. Thanks for getting me to be more pessimistic. ;)
- ashtonkem 7y agoRetail real estate doesn’t look anything like home real estate financially, which is why it does “weird” things compared to homes, such as leaving units empty for months in desirable areas. The core of it is how commercial real estate is financed; it’s financed on a rolling basis rather than a 1 time mortgage, like a home. This means that rather than revenue most commercial real estate owners are more concerned about what their next financing round will look like. For reasons I cannot explain, bankers care less about the rent a building does receive than they care about the rent it could receive. This incentivizes building owners to leave units empty rather than lower rates, as it actually ends up significantly cheaper for them in the long run.
- dehrmann 7y agoIt's a bet against home values if Wells is worried they wouldn't be able recoup the value of the loan if the borrower default. Alternatively, they're worried that the government will block foreclosures, so they'd rather not load out money they can't recoup, and they'll take their chances with insolvent homeowners sooner rather than later.
- ashtonkem 7y agoHome price and labor value are closely tied under most circumstances. If lots of the population loses the ability to pay their mortgages, one would expect home value to drop as fewer can afford to buy foreclosed or distressed property. As a large mortgage provider, home prices are the best tool that WF has to hedge against large changes in labor value.
- rcpt 7y agoI think that's a bit idealized. When the price-rent ratio is high, like now and in every other housing bubble, home values detach from labor as they're driven mostly by speculation.
- ashtonkem 7y agoAny rational discussion about price relationships should include a “bubbles excluded” caveat.