Home Equity Line Of Credit
Those considering home equity line of credit applications may want to contact their broker of choice. New fed rate cuts have brought the rates lower than they’ve been for some time, a good thing for those with tight finances or concern over a soon to be adjusted mortgage.
Most importantly, a Home equity line carries tax deductible interest, unlike credit card interest!
Bad News For Big Banks
Gary North has a wonderful editorial addressing the current banking situation:
The subprime mortgage crisis constitutes the worst banking error in my lifetime. Nothing else comes close.
It has visibly begun to unravel. The European Central Bank on Tuesday, December 18, opened a line of credit of $500 billion to commercial banks.
The Federal Reserve System under Greenspan was the prime instigator. It forced down short-term interest rates by supplying the overnight bank-to-bank loan market with sufficient liquidity to drop the rate to 1%. This encouraged banks to make loans at low rates.
These loans were short-term loans. The borrowers then went out and bought long-term assets: bonds and mortgages. This is known as the carry trade. The pioneering central bank in the carry trade was the Bank of Japan. It lowered short-term rates from about 7% in 1990 to just above zero in 1999, where it stayed until mid-2006. But the yen is not the world’s reserve currency. The U.S. dollar is.
This may have a negative effect on home equity line of credit rates. Those considering such a loan may find it prudent to lock in a rate now, as they won’t likely fall.
The Economic Game
Many are wondering just what direction the US economy is heading in. Obviously, it’s not a particularly good one. Commonsenseforecaster editorializes:
What’s with all the gloom about the U.S. economy? The problem is that we have two problems. One is that the economy is slouching toward recession or, at best, slow growth. It’s the consequence of falling house prices, higher energy prices, flagging consumers and shrinking profits.
The other is that the market for credit, the lifeblood of a modern economy, isn’t functioning well. That problem is amplifying the pain caused by the first.
Just a few weeks ago, a lot of folks were arguing that the worst was behind us. Housing was still ailing. But after a big wallop, markets for credit seemed to be moving toward normalcy. The Federal Reserve ended its Oct. 31 meeting declaring that the “upside risks to inflation roughly balance the downside risks to growth.” If Fed officials truly believed that then, they no longer do. They’ll likely cut interest rates again on Tuesday. Only the most optimistic observers expect the U.S. economy to rebound quickly from its fourth-quarter slump. The argument now is between those forecasters who expect growth to be so slow in early 2008 that the unemployment rate climbs a little, and those who see a recession in which it climbs more.
In ordinary times, this would be unpleasant, but not so frightening. The Fed knows how to treat this condition: cut interest rates.
Me, I’d place my bet on a recession. Get your home equity line of credit fast, before the credit lines truly dry up.
Congress Does The Wrong Thing…Consistently
Many are starting to wonder just what Congress was elected to do…because so far they seem to be doing very little right. Here’s the latest from the Baltimore Sun:
Last night the Senate passed a bill to fix the Alternative Minimum Tax, which keeps vacuuming in non-rich households and hitting them with high taxes, an outcome Congress never intended. But it failed to replace the lost revenue and refused to tax venture-capital and hedge-fund partners at the rates everybody else pays. In other words, it made sure regular folks don’t have to pay fat-cat rates. But it refused to make sure fat cats pay regular-folks rates. Charles Rangel, chairman of the House Ways & Means Committee, reportedly said he won’t oppose removing a tax increase on venture- and hedge-fund managers in a bill that the House passed.
Essentially congress is ensuring that the wealthy continue to receive tax breaks while those that make far less pay more. Seems rather illogical given the current state of affairs for the US economy. Affording to live is becoming more expensive every day, and inflation is hurting many consumers (though making some loans like home equity line of credit loans more affordable).
Credit Availability Is Stretched
Those hoping to seek a home equity line of credit may find the opportunity passing as each day passes, due to the current credit crunch within the US economy. Globaleconomicanalysis reports:
Right now there is a big disconnect between the equity markets and the credit markets. This is not a stable situation. Perhaps we have a hint of what December will bring given a rare November stock market decline and a negative start to December.
But regardless of how December concludes, the current conditions are not going to be resolved by a 50 basis point cut or even a 100 basis point cut by the Fed. We are facing solvency problems, not liquidity problems.
The ability of consumers and businesses to take on credit has been stretched to the limit regardless of what the interest rate is.
A lack of credit is a terrible thing for homeowners, businessowners, and those looking to buy a home in the future. If availability fails to recover, chances are high that a recession will ensue.
This coupled with the nation’s falling dollar spells bad news for the nation’s economic future.
Bush to Outline 5-Year Rate Freeze
Much to the delight of lenders worldwide, it appears that the US government is prepared to throw more money into lender’s pockets in order to save them from *gasp* losing money on bad loans which they made.
Reuters is reporting:
President George W. Bush is expected to outline on Thursday a plan to freeze mortgage rates for five years for many U.S. homeowners facing sharp increases in their monthly payments, industry sources said on Wednesday.
Final details of the plan are still being worked out after a trade group that represents large mortgage investors presented its framework for implementing a broad rate freeze to the Treasury Department late on Tuesday, the sources said.
“The president will make a statement on housing issues tomorrow afternoon,” a senior administration official said, declining to elaborate on details.
Yet again, those that have wisely budgeted for their mortgage or home equity line of credit are getting the short end of the stick, while those with high rates loans are getting bailed out.
SIV Managers Take Action
An article published by Bloomberg takes a look at MBIA’s recent collapse of its Hudson Thames SIV as bond insurers are feeling the heat. According to the article:
- MBIA Inc., the largest bond insurer, is winding down its structured investment vehicle after failing to find buyers for the SIV’s short-term debt since August, Chief Financial Officer Chuck Chaplin said.
- MBIA has shrunk its Hudson Thames Capital SIV to about $400 million from $2 billion through asset sales to bondholders, Chaplin said.
- SIVs, which borrow short term debt to buy higher yielding assets, are collapsing as contagion from U.S. subprime mortgage defaults drives investors away from asset-backed debt.
- Most banks and asset managers that operate SIVs are working on plans to restructure the companies and don’t expect the business model to survive, Moody’s Investors Service analysts said earlier this month. The New York-based ratings company said today that HSBC’s SIV restructuring doesn’t affect the bank’s credit ratings.
It’s amazing how a company can depend so greatly on the liquidity of the currency and the confidence of the consumer. As soon as these problems arise, any company dealing with credit- (or home equity line of credit loans) companies which usually strive- begin feeling the heat to keep their heads above water. It will be interesting to see how long this crisis lasts, and who will be left when it is over.
California Government Fights Against Foreclosures
An article published by Loan Workout gives details on the California government’s plans to actively fight the rise in foreclosures- which rate in California is twice the national average. According to the article:
- With California impacted more than any other state by the national home foreclosure crisis, Governor Arnold Schwarzenegger worked with loan servicers from Countrywide, GMAC, Litton and HomeEq to agree to streamline “fast-track” procedures to help keep more subprime borrowers in their homes. Together these four enterprises service more than 25 percent of issued subprime mortgage loans.
- “With this type of cooperation from loan servicers, we can save tens of thousands of people from being added to the foreclosure lists. This common-sense approach does not involve a government subsidy or bailout,” said Governor Schwarzenegger. “Borrowers need to do their part too. If these lenders are willing to meet more than halfway, it’s important that consumers don’t run when they reach out. It was a two-way street that got us into this mess and it will be a two-way street that gets us out.”
- The Governor will also continue to lobby Congress to raise federal loan limits so that more California families can take advantage of these secure products, rather than relying on subprime loans.
It is good to see government officials working to find solutions for the crisis at hand. That is, after all, what we elect and pay them to do. I particularly like the fact that Governor Schwarzenegger is going to make borrowers and lenders alike work to get themselves out of this mess. All the government is going to do is make sure that both parties are giving and receiving what they should be. In a time like this, I think that is exactly what role the government should be filling. Sometimes borrowers just need to figure things out themselves, with options such as home equity lines of credit always viable alternatives.
Industries Other Than Banking Start to Hurt
As expected, businesses other than banking are starting to suffer from the subprime meltdown. The fall of Swiss Re indicates the trouble which may soon affect many other industries.
CommonSenseForecaster is reporting:
Swiss Re has conducted a thorough review of other credit default swap exposures and was satisfied it has no similar exposures, according to a slide presentation before a conference call with analysts.
Unprecedented and severe ratings downgrades by credit ratings agencies and the lack of a liquid market for the securities “has resulted in a significant and material reduction of the value of the underlying assets,” Swiss Re said on Monday.
While lenders and providers of home equity line of credit loans are obviously vulnerable to market declines, the world economy is finding out that sub prime lending extends out towards many other industries as well.
Is Recession the Next Phase of the Crisis?
An editorial published by Money and Markets takes a look at the building evidence of a recession. Here is an excerpt with several interesting points:
- The housing crisis is gutting the home equity of millions of households, abruptly ending their ability to use it as a personal ATM machine.
- Big retail chains are expecting a holiday shopping season that one leading analyst calls “a train wreck under the Christmas tree.”
- Even technology companies — thought to be a place for investors to hide from the fall-out of the housing crisis — are getting smacked, as evidenced by the rout in their shares last week.
- And most important …
- The credit crunch has spread to the nation’s banks with the force of an F5 tornado. It’s tearing into the banks’ portfolios. And it’s triggering their most intense tightening of lending standards in nearly two decades.
- Meanwhile, word leaked out on Friday that three major banks — Citigroup, JPMorgan Chase and Bank of America — may be near a deal to create a $75 billion superfund to help stabilize credit markets.
- But it won’t end the crisis. Even Treasury Secretary Henry Paulson said on Thursday that the fund would not rescue troubled institutions; it would only lead to a longer and more orderly demise.
With the rising evidence, it’s no wonder that analysts fear a recession. Companies have been trying to restore consumer confidence with funding proposals left and right. But will it only delay the inevitable? At this point, we can only wait and see.
A recession will likely result in increased rates for loans such as a home equity line of credit.