Mr Mortgage: HELOC Hard-Ball

Mr Mortgage is a 20-year residential mortgage banking veteran, specializing in wholesale and correspondent sales and sales/operations management and bringing financial institutions into new lending markets. Since 2006, his primary focus has been upon his work as an independent research analyst at his firm, The Field Check Group. His 20-years industry experience, extensive research and access to proprietary data few have available has led him to make an extraordinarily large number of early and accurate predictions about the ‘Great housing, mortgage and credit meltdown’ and company-specific events. His body of publicly released work can be found at


Mr Mortgage Guide to the TRUTH! Mid-Week Update – Feb 12th 2009

– Wells Fargo- HELOC Hard-Ball. 10%+ Rates for Existing HELOC Customers
-Banks Sweeping Checking/Savings Accounts to Pay Late Bills
-Wells Fargo – Testimony Mark-to-Mark Boo-Boo
-RBC Bullish SoCal Housing Call. – It Can’t Happen.

Good Morning,

No matter what the press says I am not taking my eyes off of the TALF. Just because financial insti’s can’t lever 50:1 any longer does not mean that the solons can’t use their balance sheet in order to make the deal so sweet that private money has to come in. I think the TALF is the only truly creative idea yet – simply because it is not a guess that low-risk high-leverage is sexy and sells. But the problem keeps growing so large that each passing week makes their latest TALF size estimates look puny.

A consumer-related real estate TALF would likely have an impact. I have said for a year and a half that ‘unless the high-leverage loan programs don’t come back, potential borrowers don’t get a 300% raise or if rents don’t triple’ that real estate will gravitate to the most readily available financing, which is GSE =<$417k. Then ‘from $1 to $417k, historic multiples of 1-4 times median household income for the state/city/zip will rule’. If the gov’t were to back new exotic real estate loans that allowed anyone with a relatively decent credit score and 5% down to buy $1 million worth of real estate, it would sell no doubt. Why does it sound so risky in the context of real estate?

On top of being the greatest wealth transfer of all time TALF provides the crack that the markets need. If it does work however, I don’t think anyone will know for a long time. It not like one day we will wake up and it will look like 2003-2007 again. Life is going to be simpler when all of this is ‘fixed’. The excesses and symbols of the past five-years like McMansions, Cadillac Escalades with 24” spinners, $90k water-ski boats, 600hp street cars and new, lavish 4000 room mega-casino’s will be almost embarrassing. They will carry such a stigma and be so in contrast to what is presently being produced that they will stand out like a sore thumb. Even clothing and hairstyles will change.

Everything will be different once we wear out all of the ‘things’ presently in existence from the bubble years. “That’s so bubble” will be used to refer things of the time period exactly how we refer to former eras like the 70’s and 80’s. Enough of this…it makes me sad. I like my 24” spinners.

WFC HELOC Hard-Ball – Changing Rates on Existing HELOC to over 10% Automatically

This is the second time I have hear this so I do not think it is borrower specific. A close friend has a $1.4 million home with a first mortgage of $150k and a HELOC of $900k — both from Wells. He also has a savings and checking there. Due to warnings from me in 2007 that he may lose the ability to draw on the HELOC he pulled out all of the available money and put it into his investing account. He used the funds to short the banks but that’s for a different story.

He got a very plain looking letter in the mail from Wells last week. He almost threw it away it looked so unassuming. Lucky he can afford a little pain but this is a real jam-job for most. With the new found love for 30-year fixed rate money, people may just accept this ‘offer’ thinking it is the right thing to do. I can hear home owners right now asking…‘why would our bank do anything that was not in our best interest especially surrounding a mortgage loan during these times’ This is what it says in a nutshell…

“Dear Borrower,

We have taken your 4% HELOC rate to 10.13% effective 3/16. You have two choices. 1) Lose the ability to draw on the line again even if you pay it down and continue to make Prime-based cheap payments 2) Accept 10.13% fixed for 30-years and we will keep the line open for you. We have also been so kind as to ‘clarify the language’ of the agreement surrounding ‘default, closure, minimum payments and reevaluation of your creditworthiness.’

The rub here is that Wells ALREADY switched the terms to the 10.13% and the only way out is to ‘decline’ the offer by March 15th. It is very confusing. Of the hundreds of thousands of these that Wells may have sent out, how many will go unattended to? My guess is a large percentage. In the next statement that comes, these borrowers will see a payment increase of 150%! Think that may lead to some HELOC loan defaults? This is radical. This does not lead to warm and fuzzy feeling for the bank.

-Banks Sweeping Checking/Savings Accounts to Pay Late Bills

Unfortunately, a different friend that has been in the mortgage business for 15-years is going through some hard times re-inventing herself. She is doing well in this terrible market but as with so many, got a bit over-levered during the bubble years and is now spreading it thin trying to keep all of the monthly payments going out. Some months when it is thin, she will chose to skip a payment on a specific card or two to pay other things…but she is paying nevertheless.

Yesterday morning she logged into her Wells Fargo checking and savings accounts to pay bills online and there was a ZERO balance across her accounts. However, her debt was paid down considerably. Immediately she called Wells and they informed her that because she was over 30-days late paying her Wells credit that they drained the accounts in order to pay down the bills.

This is also the second time somebody I know personally has had this happen with Wells – the first had their accounts drained of about $5k to bring current a HELOC payment. Leaving people with zero money and no credit is a drastic measure. Stories like this will get around quickly – it will not be too long before you hear about practices like this on 60-Minutes (I happen to know someone there!)

Yes, the money was owed and she was getting calls from Wells collectors but I still have to question the way this was done. This ensures she defaults on everyone else this month and in the future must keep all money out of banks from which she has credit.

– Wells Fargo – Testimony Mark-to-Market Boo-Boo

Yesterday during the banker testimony yesterday, a Congresswoman asked the CEO’s ‘how many of you are for doing away with M2M accounting?’ Wells’ CEO immediately rose his right arm in the air, looked to his right and nobody else had their arm up. She said ‘so only one?’ He said ‘uh uh, maybe not do away with it – but mark it to cash flows’. I think that only one of eight CEO’s raising their hand was a big tell.

On the residential side, WFC knows about the wave that is built up in the Alt-A, Jumbo Prime, Prime and HELOC spaces. The wave just has not broken on their shores ‘yet’ due to the way higher-paper grades are structured. This Spring/Summer it comes ashore. Cash-flow, or face-value accounting, prevents this from being as painful for them as it obviously will be.

RBC Bullish SoCal Housing Call – It Can’t Happen.

Yesterday an RBC analyst was on Fast Money talking about banks and brokers. He made the mistake of throwing in speculation about a bottom in residential real estate, citing SoCal as an active market on the mend due to affordable prices and foreclosure sales cleaning out the inventory. He mentioned home builders as a place to snoop around as a possible trade. More and more are taking this side. This is nothing more than a bad guess based upon one dataset, housing sales that will not come true anytime soon.

What everyone forgets about is the never ending housing supply that keeps coming 6-9 months following loan defaults. Defaults are a leading indicator of foreclosures, supply, house price depreciation and subsequently more loan defaults. The default and foreclosure overhang will keep wraps on the CA market as far as I can see into the future.

Yes, at the very low end affordability is good and the market is busy mostly from investors. But the ultra-low end is not most of the CA real estate market – yet.

The majority of lower-end sales are foreclosure-related. What most analysts do not take into consideration is that most of the foreclosure inventory seen to date is only from the Subprime universe collapsing. This is because the foreclosure process takes so long by the time the home is put back on the market it can be a year. Add in the 2-12 month sales time line (depending upon the aggressiveness of pricing) and most foreclosure-related sales going off today were from loans on which borrowers first missed a payment in mid to late 2007 or very early 2008. Back then there were very few defaults other than Subprime. In the past six months, the first wave of higher-grade defaults has hit hard and these homes will not be foreclosed upon and resold for months if not a year.

Additionally, with no reasonable Jumbo financing, the upper end will buckle in 2009 adding even more supply as the Alt-A, Pay Option, Jumbo Prime and Prime loans fall. Any borrower with a present loan outside of what the GSE’s or FHA will do, which is a large percentage of CA, is stuck in it. They can’t refi and if underwater, can’t sell. By virtue of most loan programs going away leaving borrowers stranded, every old vintage loan type that is unavailable today (i.e.: Jumbo Prime) in which borrowers are stranded have to be classified as ‘Subprime’. Already we are seeing significant prince compression from the ultra-high end and high-end.

Most tend to also forgot about the pent-up supply from folks who wanted to sell all the way down until prices took them into a position in which they couldn’t. If the housing market does miraculously recover and prices start to increase the overhang from sellers awaiting a high price will keep a lid on any potential run for years. Every one percentage point up in prices will bring sellers out of the woodwork. With home ownership rates as high as they were going into this mess and lending guidelines such that a borrower who went through a foreclosure, short-sale or bankruptcy is unable to purchase for a large number of years, where are all the buyers going to come from?

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