Wells Fargo temporarily suspending applications for home-equity lines of credit(wellsfargo.com)
wellsfargo.com
Wells Fargo temporarily suspending applications for home-equity lines of credit
https://www.wellsfargo.com/equity/line-of-credit-details/
217 comments
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.
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.
It'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.
Home 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.
As a large mortgage provider, home prices are the best tool that WF has to hedge against large changes in labor value.
They may also lack confidence in their ability to foreclose on homes with delinquent HELOCs.
And the resale value of the foreclosed home would be lower too. Good collateral is important.
I 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
Potentially 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.
- 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.
There'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.
Good 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. ;)
Retail 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.
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.
"it doesn't matter your religion or lack thereof"
Bet you didn't know this, but there is a company (an REIT actually) that is publicly traded on the stock market, that specializes in loans to nonprofit religious organizations..."American Church Mortgage Company". Currently appear to be paying a sizable dividend.
"The outbreak of the novel coronavirus (COVID-19) has adversely affected many industries in general and resulted in orders preventing congregation which impacts the ability of churches and other non-profit religious organizations normal methods of worship...To the extent that churches and other non-profit organizations operations in the U.S. are materially and adversely affected by the coronavirus, business and financial results of this industry, and thus our business and financial results, could be materially and adversely impacted."
...and yes, they do foreclose on churches:
"As of December 31, 2019, we had ten first mortgage loans totaling approximately $4,074,000 that are three or more monthly payments in arrears. We may incur a loss if these borrowers are unable to bring their payments current and we are compelled to foreclose on their properties. We may be unable to dispose of the foreclosed properties on terms that enable us to recoup our expenses and outstanding balances.
As of December 31, 2019, we held title to one property located in Bethel, Ohio through a 2018 foreclosure process with an outstanding balance of $114,632"
"The business of making loans to churches and other non-profit religious organizations is highly competitive. We compete with a wide variety of investors and other lenders, including banks, insurance companies, pension funds and fraternal organizations which may have investment objectives similar to our own. A number of these competitors have greater financial resources, larger staffs and longer operating histories than we do. We compete principally by limiting our business "niche" to lending to churches and other non-profit religious organizations, offering loans with competitive and flexible terms, and emphasizing our expertise in the specialized industry segment of lending to churches and other religious organizations. Our competitive “specialty” is in offering fixed-rate, long-term loans, which few of our competitors make available to churches."
https://www.marketwatch.com/investing/stock/acmc
Bet you didn't know this, but there is a company (an REIT actually) that is publicly traded on the stock market, that specializes in loans to nonprofit religious organizations..."American Church Mortgage Company". Currently appear to be paying a sizable dividend.
"The outbreak of the novel coronavirus (COVID-19) has adversely affected many industries in general and resulted in orders preventing congregation which impacts the ability of churches and other non-profit religious organizations normal methods of worship...To the extent that churches and other non-profit organizations operations in the U.S. are materially and adversely affected by the coronavirus, business and financial results of this industry, and thus our business and financial results, could be materially and adversely impacted."
...and yes, they do foreclose on churches:
"As of December 31, 2019, we had ten first mortgage loans totaling approximately $4,074,000 that are three or more monthly payments in arrears. We may incur a loss if these borrowers are unable to bring their payments current and we are compelled to foreclose on their properties. We may be unable to dispose of the foreclosed properties on terms that enable us to recoup our expenses and outstanding balances.
As of December 31, 2019, we held title to one property located in Bethel, Ohio through a 2018 foreclosure process with an outstanding balance of $114,632"
"The business of making loans to churches and other non-profit religious organizations is highly competitive. We compete with a wide variety of investors and other lenders, including banks, insurance companies, pension funds and fraternal organizations which may have investment objectives similar to our own. A number of these competitors have greater financial resources, larger staffs and longer operating histories than we do. We compete principally by limiting our business "niche" to lending to churches and other non-profit religious organizations, offering loans with competitive and flexible terms, and emphasizing our expertise in the specialized industry segment of lending to churches and other religious organizations. Our competitive “specialty” is in offering fixed-rate, long-term loans, which few of our competitors make available to churches."
https://www.marketwatch.com/investing/stock/acmc
I 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.
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.
4) They couldn't see a way to make money by fraudulently opening millions of fake accounts in the process.
I 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.
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.
In 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.
I think the question is one of ethics or morals, and not predation.
If 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.
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.
I 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.
> 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/), 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.
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/), 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.
I agree - I see this as much more of a comment on consumer credit-worthiness than on home/land values.
It’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.
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.
> 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/...
"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.
I remembered this: 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.
> 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.
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.
"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
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
It’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.
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.
Same story with jumbos.
The 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.
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.
I 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).
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).
The massive and steady increase in home value would suggest a bubble, no?
No — a bubble is "a situation in which asset prices appear to be based on implausible or inconsistent views about the future."[1]
Home value increases have not been particularly steady. And to the extent there is a sustained effect, it is in part due to long-standing government priority of individual home ownership, implemented in a policy of subsidizing home ownership, and in part due to concentration of jobs and people in cities as part of a labor shift.
Edit: almost_unusual makes a good remark that some locales are probably in bubbles and others not; it's something specific to any given region rather than some sweeping statement about the national market.
[1]: https://en.wikipedia.org/wiki/Economic_bubble
Home value increases have not been particularly steady. And to the extent there is a sustained effect, it is in part due to long-standing government priority of individual home ownership, implemented in a policy of subsidizing home ownership, and in part due to concentration of jobs and people in cities as part of a labor shift.
Edit: almost_unusual makes a good remark that some locales are probably in bubbles and others not; it's something specific to any given region rather than some sweeping statement about the national market.
[1]: https://en.wikipedia.org/wiki/Economic_bubble
>No — a bubble is "a situation in which asset prices appear to be based on implausible or inconsistent views about the future."
"AirBNB or something like it will exist in 2 years."
"Monetary policy will not begin to dry up the glut of cash which has objectively ballooned asset prices since 2008."
"Covid will not permanently change certain habits which would otherwise cause a devaluation of property in major cities."
"Some major economic entity will not collapse in the next 2 years."
>it is in part due to long-standing government priority of individual home ownership
This strikes me as a commonly-bandied, well-debunked talking point.
"AirBNB or something like it will exist in 2 years."
"Monetary policy will not begin to dry up the glut of cash which has objectively ballooned asset prices since 2008."
"Covid will not permanently change certain habits which would otherwise cause a devaluation of property in major cities."
"Some major economic entity will not collapse in the next 2 years."
>it is in part due to long-standing government priority of individual home ownership
This strikes me as a commonly-bandied, well-debunked talking point.
I think your first argument can be summarized as "everything is uncertain, so the future asset value of anything should be assumed to be zero." This is not an especially useful valuation strategy, so nobody else uses it.
> [remarks on US promotion of homeownership] strikes me as a commonly-bandied, well-debunked talking point.
Please provide a "debunking" of the idea that the US government does not explicitly prioritize, as a matter of policy, and subsidize, home ownership. Here are some facts that run counter to that idea:
1. The US literally has a "National Home Ownership Month" (it's June).
2. The mission statement of HUD's Office of Housing includes "Maintain and expand homeownership."
3. FHA loans.
4. Mortgage interest deduction on primary residences.
5. Capital gains exemption on (a large portion of) primary residence sales.
> [remarks on US promotion of homeownership] strikes me as a commonly-bandied, well-debunked talking point.
Please provide a "debunking" of the idea that the US government does not explicitly prioritize, as a matter of policy, and subsidize, home ownership. Here are some facts that run counter to that idea:
1. The US literally has a "National Home Ownership Month" (it's June).
2. The mission statement of HUD's Office of Housing includes "Maintain and expand homeownership."
3. FHA loans.
4. Mortgage interest deduction on primary residences.
5. Capital gains exemption on (a large portion of) primary residence sales.
No, the first argument is that you, and others, are underestimating the certainty of the examples given coming to pass. Should they, the assumptions under which the market seems to be operating become falsified.
>Here are some facts that run counter to that idea:
Well, first, I'd like to see facts that actually run counter to that idea. What you've shown is that the government supports and promotes home-ownership for a portion of the population. They don't prove that the government prioritizes home ownership over other policy that could be contributing to asset value increases - say, signals to our national bank to manipulate the money supply. One way to check would be to compare the amount of funding vested in pro-home ownership policy to the amount related to the aforementioned.
Suffice it to say, I'd love the government to invest in the average American to the degree that they've invested in the people who can most directly access the benefits of liberal monetary policy.
>Here are some facts that run counter to that idea:
Well, first, I'd like to see facts that actually run counter to that idea. What you've shown is that the government supports and promotes home-ownership for a portion of the population. They don't prove that the government prioritizes home ownership over other policy that could be contributing to asset value increases - say, signals to our national bank to manipulate the money supply. One way to check would be to compare the amount of funding vested in pro-home ownership policy to the amount related to the aforementioned.
Suffice it to say, I'd love the government to invest in the average American to the degree that they've invested in the people who can most directly access the benefits of liberal monetary policy.
I 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.
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.
The 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.
There also really isn’t much of an incentive to sell unless you plan on buying more homes in the Bay Area. The tax hit is too high to simply cash out.
Especially with rents as high as they are. Some higher end 1BR condos are cash flow positive immediately at purchase at the moment. Much more tax efficient, too.
This is the sort of reasoning that scares me, because it assumes prices stay the same across wide economic shocks. Prices don't stay the same. In my neighborhood I've seen widespread move-outs at the end of March and April - as in I'd take a 10 minute walk around the block and see 5 families moving out at that instant. When you've got 20% vacancies you have a very strong incentive to drop prices and fill that apartment now, or else you get foreclosed upon because you're not getting rent. I just took a quick glance at Craigslist and am seeing a $200-300/month drop in rent just in the last couple weeks. My neighborhood is at the bottom of the market, but economic distress tends to travel up-market as spending drops, people seek cheaper digs, and vacancies trickle down.
If lots of people were buying 1BR condos because they saw a profit opportunity arbitraging the difference in rent vs. mortgage payments, then a small drop in rents might mean that a large number of people can't make their mortgage payments. That's a big problem, because it implies a foreclosure wave that'll put further downward pressure on prices.
If lots of people were buying 1BR condos because they saw a profit opportunity arbitraging the difference in rent vs. mortgage payments, then a small drop in rents might mean that a large number of people can't make their mortgage payments. That's a big problem, because it implies a foreclosure wave that'll put further downward pressure on prices.
That's the risk, right. You have to account for that or you're doing a really bad job of building a real-estate business. This is often cited as a reason multi-family homes (or larger) are better for landlords than individual units: if you have an apartment you rent out and you have a vacancy, that's a 100% vacancy rate. If you buy a 10-plex and you have a vacancy thats a 10% vacancy rate.
Luckily, or not depending on how you look at it, SF properties and rents tend to be fairly predictable as compared to other markets in large part due to the artificial supply constraints imposed by city council, and the huge demand of the tech industry which tends to weather downturns pretty well. If you can afford $4500/month in rent for a 1 bedroom, chances are you're not going to be fired first.
Luckily, or not depending on how you look at it, SF properties and rents tend to be fairly predictable as compared to other markets in large part due to the artificial supply constraints imposed by city council, and the huge demand of the tech industry which tends to weather downturns pretty well. If you can afford $4500/month in rent for a 1 bedroom, chances are you're not going to be fired first.
Cash flow positive mortgage purchase in the bay area? Can you share an example?
[deleted]
Personally I'm a huge fan of 855 Folsom (https://www.redfin.com/CA/San-Francisco/855-Folsom-St-94107/...). It's got that prison-chic aesthetic I love -- kidding, but not kidding -- the architect was Stanley Saitowitz [1]. I nearly bought a unit there. Went with something north of Market instead.
A similar unit is on HotPads renting for $4500/month (https://hotpads.com/855-folsom-street-san-francisco-ca-94107...).
So with 20% down, 30 Year Fixed, 3.905% Interest, you're paying $3353 in mortgage, $903 in taxes, $605 in HOA and $163 in homeowners insurance. Set aside 1%/year for damages and repairs - $74/mth. (total $5100).
66% of your mortgage in the first year and all those fees are tax deductible, so you can deduct a total of $3900/month. [2] Depending on your tax bracket you can expect to get back $1500.
So your total expenses ($5100) minus tax deductions ($1500) is $3600/month, and it's renting for $4500. You could realize $900 free cash flow, assuming you're a well paid tech worker. Not to mention you'd have your renter building equity in your unit for you -- another $1106/month. Depending on how you account for that, your monthly realized profit could be about $2000.
NOTE: That's after-tax cash flow, which is the model I went with when I was running numbers on my own unit, and it depends on your tax bracket. I picked pretty generous numbers so YMMV.
[1] https://en.wikipedia.org/wiki/Stanley_Saitowitz
[2] https://www.irs.gov/businesses/small-businesses-self-employe...
A similar unit is on HotPads renting for $4500/month (https://hotpads.com/855-folsom-street-san-francisco-ca-94107...).
So with 20% down, 30 Year Fixed, 3.905% Interest, you're paying $3353 in mortgage, $903 in taxes, $605 in HOA and $163 in homeowners insurance. Set aside 1%/year for damages and repairs - $74/mth. (total $5100).
66% of your mortgage in the first year and all those fees are tax deductible, so you can deduct a total of $3900/month. [2] Depending on your tax bracket you can expect to get back $1500.
So your total expenses ($5100) minus tax deductions ($1500) is $3600/month, and it's renting for $4500. You could realize $900 free cash flow, assuming you're a well paid tech worker. Not to mention you'd have your renter building equity in your unit for you -- another $1106/month. Depending on how you account for that, your monthly realized profit could be about $2000.
NOTE: That's after-tax cash flow, which is the model I went with when I was running numbers on my own unit, and it depends on your tax bracket. I picked pretty generous numbers so YMMV.
[1] https://en.wikipedia.org/wiki/Stanley_Saitowitz
[2] https://www.irs.gov/businesses/small-businesses-self-employe...
Thanks for sharing. It's true that the numbers are reasonably close there. I wonder if this results on the type of property, because my experience looking at this was that the business was banking on appreciation more than cashflow. Even real estate companies have decided to ignore SF (Open door, Unison, etc)
[*] I doubt that you can rent such a unit at 4,500. Its well above market, so it either has high rotation or high closing costs. Also really hope the US cleans up their act with their tax policies on housing.
[*] I doubt that you can rent such a unit at 4,500. Its well above market, so it either has high rotation or high closing costs. Also really hope the US cleans up their act with their tax policies on housing.
I think many businesses do tend to focus on appreciation over free cash flow because a lot of the FCF in my model comes from tax deductions which aren't super relevant for a business which then distributes all its proceeds. The win here might be whatever the positive take on a lack of economy of scale might be called.
Remember 20%-down mortgages are 5X leveraged investments in real-estate so even a 1% appreciation in the underlying works out to a ~5% ROI. To the extent they break even on rental I could easily see why they'd rather take the appreciation.
OpenDoor would have a heck of a time in SF, buying units sight-unseen. On the one hand it would be lower risk thank Phoenix, but it would tie up an ungodly amount of capital.
Re [*]: Totally. $4,500 is a lot, no question, though in it's favor units at 855 come with deeded parking -- in the building, which is ~$300/month in extra value for downtown condos. They're also new, super-modern lofts, and quite large, and SOMA lofts are very reasonable on a $/sqft level. 10 minutes walk to the IG and FB buildings too. I think factoring in all the +'s it's not uncompetitive with similar units nearby without parking in the low 4000's range.
Remember 20%-down mortgages are 5X leveraged investments in real-estate so even a 1% appreciation in the underlying works out to a ~5% ROI. To the extent they break even on rental I could easily see why they'd rather take the appreciation.
OpenDoor would have a heck of a time in SF, buying units sight-unseen. On the one hand it would be lower risk thank Phoenix, but it would tie up an ungodly amount of capital.
Re [*]: Totally. $4,500 is a lot, no question, though in it's favor units at 855 come with deeded parking -- in the building, which is ~$300/month in extra value for downtown condos. They're also new, super-modern lofts, and quite large, and SOMA lofts are very reasonable on a $/sqft level. 10 minutes walk to the IG and FB buildings too. I think factoring in all the +'s it's not uncompetitive with similar units nearby without parking in the low 4000's range.
This is a more nuanced take and I totally agree. Everything about housing markets is very local.
Nope, on average in the United States home price per square foot is the same in constant dollar terms (give or take) as it was in the 70’s - since then the average size of an American home has gone up, however.
Larger buildings and new technology should both put downward pressure on price per square foot.
Productivity in construction is actually trending downwards, not up.
The big advancements in tech happened in the mid-20th century with suburban developments that made construction into something of a factory, on site.
In recent years, there have been a few startups trying to make a factories for multi family housing. The idea is to construct modules in a remote factory where you can drive economies of scale, and workers have consistent schedules with steady employment. Then ship modules to the site and stack the blocks in a tiny amount of time to minimize disruption.
Traditional construction management is some absolutely hellish logistics, involving all sorts of waiting for just the right contractor, and everybody carrying risk in weird ways. It's amazing that anything even gets built.
And then the planning stage is even more hellish, especially in places with high cost of construction like California. Only single-family-home builds have any sort of guarantee that if you meet code and zoning, you will be allowed to build. For any thing that is more affordable, like townhomes or apartments, the political process takes priority over the planning department. California cities are also completely cash strapped because of insane unfair property tax breaks for old wealth, meaning that impact and permit fees can easily eat of 10%-25% of the entire project cost. And that's after huge expense of re-planning many times according to community and politician whim, and it only takes a tiny number of housing opponents to force builders into a game of multi-year delays to try to stop all development, by running out the clock on financing that was secured to begin the whole process.
All this is to say is that our housing problems are, at the moment, a political problem much akin the US's healthcare problems. Intractable conflicts between entrenched interests prevent common sense wins for everybody. Technology can seem like a solution (e.g. EHRs) but seldom have any impact, either positive or negative.
The big advancements in tech happened in the mid-20th century with suburban developments that made construction into something of a factory, on site.
In recent years, there have been a few startups trying to make a factories for multi family housing. The idea is to construct modules in a remote factory where you can drive economies of scale, and workers have consistent schedules with steady employment. Then ship modules to the site and stack the blocks in a tiny amount of time to minimize disruption.
Traditional construction management is some absolutely hellish logistics, involving all sorts of waiting for just the right contractor, and everybody carrying risk in weird ways. It's amazing that anything even gets built.
And then the planning stage is even more hellish, especially in places with high cost of construction like California. Only single-family-home builds have any sort of guarantee that if you meet code and zoning, you will be allowed to build. For any thing that is more affordable, like townhomes or apartments, the political process takes priority over the planning department. California cities are also completely cash strapped because of insane unfair property tax breaks for old wealth, meaning that impact and permit fees can easily eat of 10%-25% of the entire project cost. And that's after huge expense of re-planning many times according to community and politician whim, and it only takes a tiny number of housing opponents to force builders into a game of multi-year delays to try to stop all development, by running out the clock on financing that was secured to begin the whole process.
All this is to say is that our housing problems are, at the moment, a political problem much akin the US's healthcare problems. Intractable conflicts between entrenched interests prevent common sense wins for everybody. Technology can seem like a solution (e.g. EHRs) but seldom have any impact, either positive or negative.
I mean, they could, but that doesn’t change matters - house pricing has been consistent for decades. While larger buildings and new tech put downward pressure, things like better building standards, tighter codes, efficiency programs, more expensive materials, permitting and so on, add cost.
Yes, my point was that your other comment was not a sufficient explanation for steady/rising prices.
Fair enough. However the reason I mentioned house size is because housing on average "effectively" became more expensive in real dollar terms because the median home got bigger. So while it's the same price per square foot, it doesn't matter if you can only buy square feet in bulk.
I 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.
The 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.
HELOC 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.
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.
Really? 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.
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.
Anecdotally, 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.
HELOC'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.
Wow. That sounds insane. There is so much that can happen in ten years that can make the credit/loan a much worse idea. Aren’t there still caveats in that option period about eg income, prime rate, LTV, etc?
The rate fluctuates up and down with the prime rate (usually prime + 1%).
The risks for the bank are the same risk with any type of loan. The difference here is that it’s secured against the home. I believe the max limit on it is 80% of the equity that you have in the home. Applying for an increase is the same as applying for an entirely new loan.
Just think about how many things can happen over a 15-30 year mortgage.
The risks for the bank are the same risk with any type of loan. The difference here is that it’s secured against the home. I believe the max limit on it is 80% of the equity that you have in the home. Applying for an increase is the same as applying for an entirely new loan.
Just think about how many things can happen over a 15-30 year mortgage.
Right, I get that lots can change over the course of a regular mortgage, but that's usually accounted for by the down payment/LTV. Plus, they have already committed all the capital for it and it's a known quantity. For a LOC, it's just the option to draw, and anything from 0 to 100% of those dollars could be exercised at any time, when it may be harder for them to raise capital. Plus, I've heard stories -- albeit from the UK -- of HELOC exercise being denied once their employment/income change.
I 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.
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.
I 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.
The 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).
Obviously 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.
I'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?
Nah. 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.
Yeah it’s basically a huge personal loan. Wouldn’t put them in the same category as mortgages at all.
It'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.
Wells 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.
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.
> 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
People also said the same thing about Washington Mutual. And about Bear Stearns.
https://en.wikipedia.org/wiki/Washington_Mutual
Could this just be a political power play to pressure the US gov not to pass any mortgage forbearance, forgiveness, or similar measures?
> “ 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.
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.
I find your position compelling, but your post would be better with an example of those overt and public acts.
> 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?
May I mention how absolutely insane is the richest person has more wealth than that?
Why 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.
Many studies have shown that inequality is bad for society irrespective of the overall absolute wealth of the society.
One saving grace of inequality, which I think doesn't get enough love, is that fractional trillionaires are spending lots of money right now to get humanity into space. The governments can't do it. Apollo was an off-by-one success, followed by decades of failure. Boeing used to do this contracting work, now they can't build jets, can't build tankers, can't build rockets, and can't build crewed orbital vehicles. Blue Origin and SpaceX are kicking the * of the US governmental space development effort, while taking the cash the US spends on access to space. Without those fractional trillionaires, we'd be stuck with leaky Boeing rockets sending crews to their deaths.
That 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.
Why 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.
You'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.
Well, whether it's subjective name-calling depends on whether you substantiate it in some way. If it's a contradiction in terms, then name-calling is not the issue. And if it isn't, it might be possible to defend it.
I think there's some ambiguity in the idea that something people repeat is actually a "widely held viewpoint".
Saying it's bizarre seems to me to be standard shorthand for "if you really think about the implications, which people usually don't".
So-called "ideas" or "viewpoints" are more fit in an evolutionary sense the less people think about them while transmitting them.
I think there's some ambiguity in the idea that something people repeat is actually a "widely held viewpoint".
Saying it's bizarre seems to me to be standard shorthand for "if you really think about the implications, which people usually don't".
So-called "ideas" or "viewpoints" are more fit in an evolutionary sense the less people think about them while transmitting them.
> Saying it's bizarre seems to me to be standard shorthand for "if you really think about the implications, which people usually don't".
Catching up here (original commenter). Your take is spot on as to what I meant. (Probably my fault for being unclear)
Catching up here (original commenter). Your take is spot on as to what I meant. (Probably my fault for being unclear)
I’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.
Wouldn't that sort of bet against home values include pausing new mortgages as well? This signal may be something else.
Conforming mortgages get a federal guarantee.
ok, pausing new non-FHA mortgages...
Happened a month ago: https://www.reuters.com/article/us-health-coronavirus-wells-...
Although, somehow, I’ll bet my property taxes will stay the same.
Really appreciate the context, thanks.
Didn'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-...
https://consumerist.com/5283290/affidavits-on-how-wells-farg...
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-...
https://consumerist.com/5283290/affidavits-on-how-wells-farg...
It's also the fun part about credit.
When you don't need it, it is real easy to get.
When you need it, it is real hard to get.
This is why $1 in the bank is worth so much more than $1 in credit that you can maybe draw on. Especially lines of credit that can be called in.
When you don't need it, it is real easy to get.
When you need it, it is real hard to get.
This is why $1 in the bank is worth so much more than $1 in credit that you can maybe draw on. Especially lines of credit that can be called in.
Two years ago someone I know was laid off. After a three-month climb to find a new job, they vowed to put together an emergency fund. After a sudden drop in rates, they took out a small cash-out refinance. Luckily they still have a job, but the fact that they now have that cushion puts their mind at ease.
Lesson learned: take advantage of cheap credit while you can.
Lesson learned: take advantage of cheap credit while you can.
That seems like more of a roll of the dice....
If they're capable of paying back that refinance ... probably could have just saved.
I suppose there is a little window of time where it is advantageous if they're laid off again, that seems more like random chance.
If they're capable of paying back that refinance ... probably could have just saved.
I suppose there is a little window of time where it is advantageous if they're laid off again, that seems more like random chance.
They got cash while it was easy and certain. Accumulating it slowly would be as uncertain as their employment and expenses, and the option of borrowing later when they really need it may not be available. I can see how it might have been a logical choice for them.
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The page doesn't say that they are calling in lines of credit, just that they aren't issuing new lines of credit
In 2008 everyone called in lines. This is the first step.
I had some credit cards go from 50k credit line to 5k.
My credit was unchanged. They just didn't want 45k of empty credit on their books.
I had some credit cards go from 50k credit line to 5k.
My credit was unchanged. They just didn't want 45k of empty credit on their books.
A credit card is not a heloc, so is your opinion based on anything else?
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"A banker is a man who lends you an umbrella when the weather is good and takes it back when it rains."
What's your point, that it's futile to try to get a heloc this spring? Do you have evidence that it's conceivable to "call in" such a line of credit? Because I'm not familiar with an agreement that says so or an account of it happening in the past.
I wonder how much bank needs to be hurting to call in a loan / call in your mortgage to try to sell it for a fraction of a price in some unknown distant future.
This is not unexpected. JPMC halted home equity origination a week ago. This debt is kept on a bank’s books (and not government backed like mortgages), they’re limiting exposure during macroeconomic distress.
Do a cash out refi if you need to tap your equity.
Do a cash out refi if you need to tap your equity.
They are preparing for a drop in land prices.
Also presumably anyone applying for a HELOC right now is doing so to tide them over, and banks reason that many will just burn through the debt and then default with less equity.
Also presumably anyone applying for a HELOC right now is doing so to tide them over, and banks reason that many will just burn through the debt and then default with less equity.
Slightly unrelated but my guess is that we will see a flight out of urban areas as working remotely becomes significantly more prevalent. People will realize that they can't justify the insane prices, traffic, crime etc. in large urban areas. Smaller cities and remote communities will see an influx of new residents and home and land prices will increase in those areas.
Working remotely is one aspect. A counter aspect might be the lack of infrastructure in non-urban areas. Stare and local finances are getting strained. Without a large infrastructure bill, established cities are the only place to put people.
Another aspect will be the high costs to build the new housing needed to support a trend like this. Those costs might not make non-urban areas much cheaper than using existing housing stock in large cities.
Another aspect will be the high costs to build the new housing needed to support a trend like this. Those costs might not make non-urban areas much cheaper than using existing housing stock in large cities.
It's not a choice between Manhattan and the back of beyond though. Even many larger cities have exurb or even rural areas within about an hour drive where property prices, depending on the town, can be fairly affordable even if the downtown is not.
It's hard to say how many people who migrated to truly urban living take this as a sign that they should at least move out to the suburbs (where their job is anyway in many cases).
I do think that, for jobs that can be done remotely, a lot of companies are going to move away from everyone needing to be in the office all the time--though I suspect very few will go entirely remote.
It's hard to say how many people who migrated to truly urban living take this as a sign that they should at least move out to the suburbs (where their job is anyway in many cases).
I do think that, for jobs that can be done remotely, a lot of companies are going to move away from everyone needing to be in the office all the time--though I suspect very few will go entirely remote.
This is kind of my point. Most places within an hour drive of established cities are pretty well settled.
To accommodate new people towns either have to start building more housing (costs increase) or those people will have to move 1 hour and 15 minutes outside the city. Rinse and repeat until the formula doesn’t look as beneficial.
To accommodate new people towns either have to start building more housing (costs increase) or those people will have to move 1 hour and 15 minutes outside the city. Rinse and repeat until the formula doesn’t look as beneficial.
On the other hand, the migration into cities that we hear so much about is mostly among a fairly narrow demographic (young and college educated) and isn't really a huge number in percentage terms. (And it's essentially just a reversal of a net outflow that took place over decades.)
So I'm not really convinced that if some of the people who thought urban living was for them now have second thoughts, there will be a lot of problems accommodating them with housing. And again, a lot of the jobs are out in those suburbs anyway. A lot of the people who moved into cities did so because they wanted to, not because they could walk to their jobs from there.
So I'm not really convinced that if some of the people who thought urban living was for them now have second thoughts, there will be a lot of problems accommodating them with housing. And again, a lot of the jobs are out in those suburbs anyway. A lot of the people who moved into cities did so because they wanted to, not because they could walk to their jobs from there.
If it isn’t really a trend, then it can’t really reverse.
The economics depend entirely on how many people have these “second thoughts”. If it’s “a lot”, relative to those who live in cities, then it will absolutely lead to housing issues outside of cities. Which will lead to infrastructure issues (schools, water, roads, libraries, community centers, etc.). Which will lead to tax increases to pay for infrastructure. Then the cycle will kick off again.
The economics depend entirely on how many people have these “second thoughts”. If it’s “a lot”, relative to those who live in cities, then it will absolutely lead to housing issues outside of cities. Which will lead to infrastructure issues (schools, water, roads, libraries, community centers, etc.). Which will lead to tax increases to pay for infrastructure. Then the cycle will kick off again.
It's very hard to say about those "second thoughts." If the current situation turns out to be basically a blip, that's one thing. If living in dense cities turns out to carry a significant incremental health risk vs. suburbs/exurbs, that's something else.
Furthermore, the (somewhat) shift back into cities is counter the trend in the second half of the 20th century. Is it a real trend or a temporary fashion?
Furthermore, the (somewhat) shift back into cities is counter the trend in the second half of the 20th century. Is it a real trend or a temporary fashion?
Cities normally have advantages that offset those drawbacks: employers but also amenities, people to meet, events to attend. You trade off the quality of your private space for a richer public realm. But there is no public realm anymore. The biggest cities are as boring as the smallest towns.
I made this comment slightly selfishly because my wife and I left downtown Seattle about 10 years ago to live in a remote area in North Central Washington near the North Cascades National Park. We haven't looked back.
Don’t forget prolonged lockdowns as a new drawback.
Only to the suburbs. The rural areas are looking worse off, due to underbuilt infrastructure.
The problem is people with kids need access to good schools. Even if "good" is just "perceived as good by the next rung on the ladder, for entrance requirements".
These are typically available only centrally.
These are typically available only centrally.
Some people do. Some people with a stay at home parent homeschool. I don’t want my kids going to subpar public schools, so would rather have their education happen at home, which allows us to live anywhere with my remote job.
A counter point to your central schooling argument is Chicago Public Schools, which are terrible.
A counter point to your central schooling argument is Chicago Public Schools, which are terrible.
The 5 best high schools in Illinois are CPS schools [1]. The grade schools are hit and miss by neighborhood. There are great public magnet options if you can test-in or win a lottery.
That’s not to say the system is great, but there is a lot more nuance than just declaring them “terrible”. Unless me or my spouse is a trained educator, I will trust the experts. Just like I do when I need medical, electrical or plumbing work done.
[1] https://www.usnews.com/education/best-high-schools/illinois
That’s not to say the system is great, but there is a lot more nuance than just declaring them “terrible”. Unless me or my spouse is a trained educator, I will trust the experts. Just like I do when I need medical, electrical or plumbing work done.
[1] https://www.usnews.com/education/best-high-schools/illinois
I can do better on my own, my two cents, have to do what’s best for you. We sold our place in Cook County because the cost to benefit wasn’t there and property taxes will only rise (Chicago is almost $90 billion in debt per Moody’s, that’s $84k per household) while education keeps getting cut [1]. That’s a big gamble on top of your data about grade schools and magnet schools (my kids won't be in high school for more than half a decade).
I’m having a coffee watching the sunrise over Appalachia while some poor sap is dragging themselves to the Blue line. I’m not the best teacher, but life is about trade offs.
[1] https://www.google.com/search?q=cps+budget+cuts
I’m having a coffee watching the sunrise over Appalachia while some poor sap is dragging themselves to the Blue line. I’m not the best teacher, but life is about trade offs.
[1] https://www.google.com/search?q=cps+budget+cuts
You came off that “terrible schools” comment pretty quick. If you’re already going to home school it makes sense to keep taxes lower. But like I said, I’ll trust the experts who went to school and have ongoing training to educate my kids. That way I can focus on being a parent.
The way you jump between Cook County and Chicago is also a strange way to measure things. You can live in Cook County and not be in Chicago proper. Cook County has places like Evanston, Hinsdale, Kenilworth, Glenview, and Oak Park with some of the best schools in the country.
The way you jump between Cook County and Chicago is also a strange way to measure things. You can live in Cook County and not be in Chicago proper. Cook County has places like Evanston, Hinsdale, Kenilworth, Glenview, and Oak Park with some of the best schools in the country.
I might have parsed it in my head differently, allow me to expound.
I said, "CPS is terrible". You said that grade schools are hit or miss, but 5 of the top high schools in Illinois are in CPS, and that there are always magnet schools that require a lottery. In my mind, if you can't offer consistent quality across your territory (Chicago proper) and grade levels (K-12), you are a subpar institution, ie "terrible". There are pockets of success (the high schools you mention, and the luck of my kids getting into a magnet school) but one should not rely on luck for something as critical as their child's education.
I bring up the dollars involved (cook county, property taxes, Chicago debt) because that is the fuel for the education engine, and that fuel is running out (pension obligations are protected by the Illinois constitution, education is not). Therefore, it is very likely the education experience in Chicago continues to decline. If it's already bad today (which it is objectively is, based on our subthread discussion and how weighted luck is as a component of your child's experience and success), why would one double down on it (accept fate and put your kids into CPS) while also being financially exposed and locked into the structural decline?
Blindly trusting experts is a recipe for disaster. Experts don't always have your individual interests at heart. As an individual, it is your job to optimize for you and your family. I hope this clarifies my admittedly poorly constructed thesis further up the thread. I'm off to make more coffee.
I said, "CPS is terrible". You said that grade schools are hit or miss, but 5 of the top high schools in Illinois are in CPS, and that there are always magnet schools that require a lottery. In my mind, if you can't offer consistent quality across your territory (Chicago proper) and grade levels (K-12), you are a subpar institution, ie "terrible". There are pockets of success (the high schools you mention, and the luck of my kids getting into a magnet school) but one should not rely on luck for something as critical as their child's education.
I bring up the dollars involved (cook county, property taxes, Chicago debt) because that is the fuel for the education engine, and that fuel is running out (pension obligations are protected by the Illinois constitution, education is not). Therefore, it is very likely the education experience in Chicago continues to decline. If it's already bad today (which it is objectively is, based on our subthread discussion and how weighted luck is as a component of your child's experience and success), why would one double down on it (accept fate and put your kids into CPS) while also being financially exposed and locked into the structural decline?
Blindly trusting experts is a recipe for disaster. Experts don't always have your individual interests at heart. As an individual, it is your job to optimize for you and your family. I hope this clarifies my admittedly poorly constructed thesis further up the thread. I'm off to make more coffee.
==it is very likely the education experience in Chicago continues to decline.==
This is the imbedded assumption you are working with. All indications are that the system has significantly improved over the past 10 years [1]. The state also passed a significant education bill that directs more money to the district (not less, as you imply) [2]. It’s well-known that schools are neighborhood-by-neighborhood asset in Chicago. Thats part of the calculus of moving.
Nobody is “blindly trusting” anyone, not sure why you assumed that.
[1] https://www.usnews.com/news/the-report/articles/2018-04-13/t...
[2] https://www.chicagotribune.com/politics/ct-illinois-house-sc...
This is the imbedded assumption you are working with. All indications are that the system has significantly improved over the past 10 years [1]. The state also passed a significant education bill that directs more money to the district (not less, as you imply) [2]. It’s well-known that schools are neighborhood-by-neighborhood asset in Chicago. Thats part of the calculus of moving.
Nobody is “blindly trusting” anyone, not sure why you assumed that.
[1] https://www.usnews.com/news/the-report/articles/2018-04-13/t...
[2] https://www.chicagotribune.com/politics/ct-illinois-house-sc...
> I’ll trust the experts who went to school and have ongoing training to educate my kids. That way I can focus on being a parent.
Your duty as a parent is to educate your children. Why the hell would I trust the government to not indoctrinate my children?
It is truly sad that many parents wash their hands of raising their children by passing them off to the government to be educated.
Your duty as a parent is to educate your children. Why the hell would I trust the government to not indoctrinate my children?
It is truly sad that many parents wash their hands of raising their children by passing them off to the government to be educated.
Almost as sad as passive aggressive internet comments. The implication that you are only a true parent if you home school or send to private school is laughable.
Do you grow all of the food your child eats? It’s truly sad how many parents wash their hands of raising their children by feeding them something someone else grew or made.
Do you diagnose your children’s illnesses? It’s truly sad how many parents wash their hands of raising their children by passing them off to some stranger to be healed.
Do you teach your children to call the police or fire? It’s truly sad how many parents wash their hands of raising their children by passing them off to police and fire in emergencies.
Do you grow all of the food your child eats? It’s truly sad how many parents wash their hands of raising their children by feeding them something someone else grew or made.
Do you diagnose your children’s illnesses? It’s truly sad how many parents wash their hands of raising their children by passing them off to some stranger to be healed.
Do you teach your children to call the police or fire? It’s truly sad how many parents wash their hands of raising their children by passing them off to police and fire in emergencies.
> The implication that you are only a true parent if you home school or send to private school is laughable.
I did not say this nor did I imply it. Of course there are situations in which the parents are unable to homeschool. This does not make them any worse a parent. Even if you do homeschool, it's not uncommon to take some external classes as you get into the higher grades. I'm also not saying the that the parents need to write the math books they use, nor do they need to grow all food. But they certainly should feed their children with the food bought at the store. School is used to much as a day care and catch all. If it was more of a couple hours hours a week learning only math at school and at home parents actually took the time to teach virtue and discipline it would better.
I did not say this nor did I imply it. Of course there are situations in which the parents are unable to homeschool. This does not make them any worse a parent. Even if you do homeschool, it's not uncommon to take some external classes as you get into the higher grades. I'm also not saying the that the parents need to write the math books they use, nor do they need to grow all food. But they certainly should feed their children with the food bought at the store. School is used to much as a day care and catch all. If it was more of a couple hours hours a week learning only math at school and at home parents actually took the time to teach virtue and discipline it would better.
Is the person homeschooling your child more of a subject matter expert in all of the areas that the public school teaches? Many parents have found out first hand that they either didn’t know what they were doing or weren’t patient enough to teach their own kids.
>subject matter expert
I think you're overestimating the amount of background knowledge the average tech worker might need to make up to teach elementary and high school subjects from text books.
People TA entire college classes with the same amount (0) of experience.
I think you're overestimating the amount of background knowledge the average tech worker might need to make up to teach elementary and high school subjects from text books.
People TA entire college classes with the same amount (0) of experience.
I took plenty of math classes in high school and college over two decades ago. I look at the average Trig problem and I didn’t know where to start helping my son. I ended up FaceTiming my mom who is a retired high school math teacher. I also have an aunt - a retired high school science teacher - I could call. But how many people have those resources at their beckon call?
>I look at the average Trig problem and I didn’t know where to start helping my son.
Did you try reading the text book? It's made for children. It's high school math. I cannot understand this mindset but I fear it is extremely common and our society is in trouble for it.
Did you try reading the text book? It's made for children. It's high school math. I cannot understand this mindset but I fear it is extremely common and our society is in trouble for it.
Yes we are in trouble because we have this thing called specialization of labor. I learned how to develop software so I could live in the big house in the burbs with the good school system and took advantage of knowing the right people with the right set of skills to help me in other areas. I also shockingly don’t cut my own grass, do my own plumbing or fix my own cars.
>I also shockingly don’t cut my own grass, do my own plumbing or fix my own cars.
I do, and you should too. These things are not difficult to learn. Moreover they are good full body workouts and, speaking from experience with my father, can be excellent bonding experiences.
But that's beside the point. You're relying far too much on others if you've lost the ability to spend 5-20 minutes reading one chapter in a children's textbook for a chance to educate and bond with your child.
If you can learn a new programming language or framework without someone holding your hand, you can do this basic stuff. I think people either underestimate themselves or they're willing to go to great lengths to justify their laziness.
I do, and you should too. These things are not difficult to learn. Moreover they are good full body workouts and, speaking from experience with my father, can be excellent bonding experiences.
But that's beside the point. You're relying far too much on others if you've lost the ability to spend 5-20 minutes reading one chapter in a children's textbook for a chance to educate and bond with your child.
If you can learn a new programming language or framework without someone holding your hand, you can do this basic stuff. I think people either underestimate themselves or they're willing to go to great lengths to justify their laziness.
I do, and you should too. These things are not difficult to learn. Moreover they are good full body workouts and, speaking from experience with my father, can be excellent bonding experiences
I’m sure there are dozens of things we pay for everyday that are not too difficult to learn. In business, you choose between your core competencies and what is best to outsource - your typical build vs buy decisions. Even while developing you choose when to use third party frameworks and what to build yourself.
I’m not in Silicon Valley I am just in big city USA so I am in no way bragging. But by specializing in software development, that affords me the big house in the burbs, that also allows me to pay other people to cut my grass while I exercise in the comfort of my fully equipped home gym in the air conditioning.
* If you can learn a new programming language or framework without someone holding your hand, you can do this basic stuff. I think people either underestimate themselves or they're willing to go to great lengths to justify their laziness.*
I learned it the first time 20+ years ago, I have no doubt that I could relearn it - especially with the help - but everyone chooses how to optimize their time? Is my time spent better learning trig or doing something that can make me more money so I can cash flow his way through college?
I’m sure there are dozens of things we pay for everyday that are not too difficult to learn. In business, you choose between your core competencies and what is best to outsource - your typical build vs buy decisions. Even while developing you choose when to use third party frameworks and what to build yourself.
I’m not in Silicon Valley I am just in big city USA so I am in no way bragging. But by specializing in software development, that affords me the big house in the burbs, that also allows me to pay other people to cut my grass while I exercise in the comfort of my fully equipped home gym in the air conditioning.
* If you can learn a new programming language or framework without someone holding your hand, you can do this basic stuff. I think people either underestimate themselves or they're willing to go to great lengths to justify their laziness.*
I learned it the first time 20+ years ago, I have no doubt that I could relearn it - especially with the help - but everyone chooses how to optimize their time? Is my time spent better learning trig or doing something that can make me more money so I can cash flow his way through college?
Nope. We learn the material over (having been out of school for at least two decades) from the home school material, and then teach it.
If you don’t have patience, but also can’t afford private education of some sort and have to resort to broken public institutions, there's not much hope (imho). Patience is cheap (comparatively speaking).
I've learned how to weld, sail, wrench on diesel engines and my Teslas, perform wilderness EMT procedures, woodwork, and build houses/perform large scale home improvement on my own. K-12 is a cake walk. Don't doubt your vibe, you're a fellow human and you can do it too.
If you don’t have patience, but also can’t afford private education of some sort and have to resort to broken public institutions, there's not much hope (imho). Patience is cheap (comparatively speaking).
I've learned how to weld, sail, wrench on diesel engines and my Teslas, perform wilderness EMT procedures, woodwork, and build houses/perform large scale home improvement on my own. K-12 is a cake walk. Don't doubt your vibe, you're a fellow human and you can do it too.
I found one of the most important parts of K-12 is just learning to interact with people your own age + being able to work with people effectively.
Are you concerned about this? Or do you have a way to effectively replace this?
Are you concerned about this? Or do you have a way to effectively replace this?
We still socialize the kids outside of the house with playdates. Very important. Good point.
There are often group projects especially in high school. Play dates don’t teach how to work as a team.
Even in elementary school it’s an important lesson to learn that you’re not a special snowflake and you don’t get all of the attention of superiors (teachers) to yourself.
Even in elementary school it’s an important lesson to learn that you’re not a special snowflake and you don’t get all of the attention of superiors (teachers) to yourself.
The more urban an area is, the worse the public schools are. You seem to be providing even more of a reason to flee cities.
We just printed $6T but the amount of land didn't change. Why would land prices go down?
Land prices are tied to wages. Wages and employment goes down, value of land goes down. Unless the Fed starts buying up land directly, or using REITs.
> Unless the Fed starts buying up land directly, or using REITs.
This is happening. The Fed is buying mortgage backed securities.
In other words: the Fed is buying real estate.
This is happening. The Fed is buying mortgage backed securities.
In other words: the Fed is buying real estate.
It depends how much of that $6T lands in the hands of people buying land (in the near future).
If there were no worry of a recession, then land and other asset values would increase. The $6 trillion is meant to offset possible deflation and keep inflation on course for 2%.
I agree. Individuals might not be able to afford land. But large corporations will definitely be able and more than willing to.
Apple won't buy up a lot of residential real estate.
Needs to end up in people's pockets for land prices to go up.
Because much of the "value" presently seen is speculative, and there are many reasons not to be bullish for the next couple of years.
there are alternatives to believing that the value of the entire housing market is going to drop:
1. your last N years of work/credit history are currently less predictive about future income/repayment ability than banks would like. regardless of who you are.
2. even if the same amount of money continues to chase the housing market, there is (as some other comments mention) at least a little bit of a reason to believe that the money might want to move to different geographic areas. if you don't know what that change will look like, your ability to predict future home values is reduced.
1. your last N years of work/credit history are currently less predictive about future income/repayment ability than banks would like. regardless of who you are.
2. even if the same amount of money continues to chase the housing market, there is (as some other comments mention) at least a little bit of a reason to believe that the money might want to move to different geographic areas. if you don't know what that change will look like, your ability to predict future home values is reduced.
Sure there is market uncertainty, but that changes qualification criteria not the willingness to lend. I wonder if this announcement has more to do with the PPP fiasco in the banking world. I applied for an SBA loan the day before the PPP was released and my bank said basically "sorry, we're doing nothing but PPP for the next 5 weeks".
My parents took out a home equity loan in 2013 and are still buried by it, any recommendations here for how they can best service or refinance the loan?
Wait until their house is worth less than the debt. Hide their assets, bail on the house, declare bankruptcy.
I'm sure you're getting downvoted because people think this is immoral, but this is absolutely the smart move. Rich people and corporations have done a great job leveraging the natural tendency of people to feel guilty about abandoning their debt obligations, but rich people and corporations do this constantly as a matter of course.
If you're ever deep in over your head financially, the smartest thing to do is to walk away. A mere year or two after filing bankruptcy, you can easily repair your credit to the point that you can get a mortgage or auto loan at a reasonable rate. Within seven years, bankruptcy or not, abandoned debt is off your credit history. Why suffer for a decade treading water paying down interest and penalties with no hope of ever getting rid of the principal if you can just hit reset?
I'm not saying it's right to rack up enormous debt on purpose and walk away when you have the means to pay, but people literally kill themselves from stress and suicide when they can just stop paying. If you tried to do the right thing and through no fault of your own (illness, injury, massive global disruption in the economy) you find yourself in an insurmountable position, don't feel bad. Just say no.
If you're ever deep in over your head financially, the smartest thing to do is to walk away. A mere year or two after filing bankruptcy, you can easily repair your credit to the point that you can get a mortgage or auto loan at a reasonable rate. Within seven years, bankruptcy or not, abandoned debt is off your credit history. Why suffer for a decade treading water paying down interest and penalties with no hope of ever getting rid of the principal if you can just hit reset?
I'm not saying it's right to rack up enormous debt on purpose and walk away when you have the means to pay, but people literally kill themselves from stress and suicide when they can just stop paying. If you tried to do the right thing and through no fault of your own (illness, injury, massive global disruption in the economy) you find yourself in an insurmountable position, don't feel bad. Just say no.
The way I see it the buyer and the bank made a bet on the value of the house and the buyer's ability to pay. Sometimes bets don't pan out. We're trained to be emotional about it, but the bank certainly isn't. To them it's "just business" when they foreclose on a struggling family. Similarly, it should be "just business" if you bail on bad debt.
I actually really like that analogy. I can't tell you how many times I have seen comments on Personal Finance subreddit and other places that always criticize banks for being ready to foreclose on a home with no concern for the people that live there.
Of course they do, you are just a blip on the bank's radar. The decision to foreclose is a matter of business to them. So why can't borrowers do the same thing and essentially "foreclose" on the bank? Foreclosure is literally just cutting your losses. That's what the banks do all the time, so if they can do it, then why can't borrowers do it too? It is an excellent perspective.
Of course they do, you are just a blip on the bank's radar. The decision to foreclose is a matter of business to them. So why can't borrowers do the same thing and essentially "foreclose" on the bank? Foreclosure is literally just cutting your losses. That's what the banks do all the time, so if they can do it, then why can't borrowers do it too? It is an excellent perspective.
Does the bank not come after individuals years later for owed debt via lawsuit? If not, walking away seems like a good idea.
If you have a non-recourse mortgage, the bank is entitled only to the collateral (the house). Several states allow only non-recourse mortgages.
https://www.quickenloans.com/learn/the-difference-between-re...
https://www.quickenloans.com/learn/the-difference-between-re...
Your asset (home) is sold, and you owe the difference. The bankruptcy court decides a payment plan for you to pay back that difference. Usually you pay back pennies on the dollar. Sometimes you walk away clean.
When PE firms employ this strategy at the expense of individual retirement accounts everyone accepts that they “had no choice” but an individual who even dares consider the same is branded a scofflaw.
This is actually a great idea. I walked away from five underwater mortgages in 2012. I paid $1000 on a second loan during a short sale and paid 1/3 of the difference between what I owed on one after the sale. The other three I paid nothing.
Three years to the day after the last short sale, we bought a brand new build in a much better area of the city with 5% down on a custom build. No bankruptcy required.
Three years to the day after the last short sale, we bought a brand new build in a much better area of the city with 5% down on a custom build. No bankruptcy required.
People are downvoting you, but this is actually not a bad idea. People have been brainwashed into believing they should 1) forever be indebted and 2) always carry the burden of debt.
As the saying goes: If you owe the bank $100 that's your problem. If you owe the bank $100 million, that's the bank's problem.
As the saying goes: If you owe the bank $100 that's your problem. If you owe the bank $100 million, that's the bank's problem.
Banks have done an excellent job of selling the American public on the idea that creditworthiness somehow equals morality. This same advice given to a corporation would be considered by many as just what the business has to do to weather the storm.
Well said. Profile checks out.
They can sell the asset, pay off the balance, downsize to a smaller house for a smaller debt or a low rent accommodation. Save money and earn the interest on it, probably invest in the stock market now that it's in a downturn and start saving money.
Once they have a better egg they can put back into a property if they wish, hopefully with the help of a smaller loan they can actually pay.
Once they have a better egg they can put back into a property if they wish, hopefully with the help of a smaller loan they can actually pay.
Minus the stock market idea, this is good advice. If your parents took the second mortgage out in 2013 (7 years ago) and then rode one of the largest housing booms we have ever seen, and are STILL underwater, then there's something really wrong. Either the house is not sellable, or something.
If instead, OC means that they can't keep up with the payments on the home, then that would mean the solution is simply to downsize to something that they can afford. Sell the house, pay off the mortgages, and move into a rental that is within their means.
The only reason that I say that the stock market is a bad idea is that if their parents can't manage the personal finances of a simple mortgage, then making intelligent decisions in the stock market is probably not a good option for them. I am not calling them stupid, but I am just saying that investing in the stock market intelligently is multiple magnitudes more complicated than managing your mortgage. Countless studies have shown that when laymen invest in the stock market, they usually underperform the index funds.
Yes, the stock market is down right now, which is the time to buy. But just throwing money at it, simply because it is down is far from a good decision either. Some stocks right now will likely not recover for a decade or longer and many will file bankruptcy. Some will profit wildly. The stock market is going to be very volatile, which means POTENTIAL for huge gains. But unless you are making these decision with absolute care and awareness to hide possible losses, you are essentially treating it like a lottery.
If instead, OC means that they can't keep up with the payments on the home, then that would mean the solution is simply to downsize to something that they can afford. Sell the house, pay off the mortgages, and move into a rental that is within their means.
The only reason that I say that the stock market is a bad idea is that if their parents can't manage the personal finances of a simple mortgage, then making intelligent decisions in the stock market is probably not a good option for them. I am not calling them stupid, but I am just saying that investing in the stock market intelligently is multiple magnitudes more complicated than managing your mortgage. Countless studies have shown that when laymen invest in the stock market, they usually underperform the index funds.
Yes, the stock market is down right now, which is the time to buy. But just throwing money at it, simply because it is down is far from a good decision either. Some stocks right now will likely not recover for a decade or longer and many will file bankruptcy. Some will profit wildly. The stock market is going to be very volatile, which means POTENTIAL for huge gains. But unless you are making these decision with absolute care and awareness to hide possible losses, you are essentially treating it like a lottery.
Good ideas except they should not invest in the stock market, there is no guarantee that we hit the bottom even though many would like to believe so. Better to put that money in gold or other similarly scarce assets.
A few things.
First, you can always re-finance. And right now is actually a good time to re-finance, because interest rates just dropped. They could get a low APR fixed-rate Mortgage right now if they can re-qualify. The benefit of re-financing is that you could combine your Home Equity Loan (which is usually higher interest than a traditional mortgage) and your outstanding mortgage into one new payment plan. This would be most likely at a much lower combined interest than your parents are seeing right now. Interest rates right now are exceptionally low with the pandemic, so locking in a fixed-rate mortgage at these low APRs will go a long way in helping your parents pay down the balance of the loan faster, while making the exact same payment as they are right now. This is because less of the monthly payment goes towards interest.
Second, make extra payments each month. Even a hundred bucks or so, adds up quickly. For example. Let's say they owe $200,000 on the home on a 3.5% APR loan. They probably make payments in the ballpark of $1,200 a month on that amount.
On these figures, they are paying approximately 0.3% interest each month on the principal ($200,000). That is $600 a month in interest. This could be even higher if you factor in a higher APR from the Home Equity Line of Credit (probably 4.5-5% APR, or 0.4% a month). That means the Home Equity Line might be paying as much as $800 a month in interest. Let's split the difference and say half the home value is under the Home Equity Line and the other half of the value is under the first Mortgage. That's $700 a month that goes towards interest. So of their $1,200 payment each month that leaves their bank account, only $500 actually goes towards their home.
As you can see, if they just wait until next month they will again pay $700 in interest and $500 towards principal (This scale crosses over time as you lower your principal). So if they instead increase their payment just $100 a month, from $1,200 to $1,300 then they still pay the same $700 in interest, but this time $600 will go towards principal. That is a 20% increase in the speed of paying off your home with just an extra $100 a month. That also means that your principal lowers faster, which in turn lowers your interest payments (since they are based off principal) for future month. This creates a positive "Snowball" effect for your parents, quickly accelerating the speed of home ownership with a very small (additional) sacrifice per month.
Under the same example, imagine if they put $200 more per month towards it. This would be paying the house principal off at $700 a month instead of $500 a month, a 40% increase! On a 30 year mortgage, paying an extra $200 a month could mean paying off your home more than A DECADE EARLIER! The effects are incredible.
Now imagine that they DON'T have an extra $100 a month. You can have the same effect by simply refinancing your home and combining both mortgages into a single, low APR mortgage, offered right now with low interest rates of the pandemic. They could secure a 2.6% APR loan combined across both mortgages.
On a 2.6% APR mortgage they would be paying only $433 in interest each month instead of $700 (assuming the same $200,000 outstanding balance figure as before). That is an additional $267 a month that goes towards the home principal each month by making the same $1,200 payment that they were already making before. So instead of $500 a month going to principal, they would be paying $767 per month towards principal. That is a 53% increase in the amount going towards paying off your home! All while making the same payment as they are already making.
Now for the grand finale, imagine that they re-financed AND they added $100 a month to their payment. This would mean they are paying off $867 a month towards their principal, which is 73% increase in their loan payoff. If they were to add $200 a month to their payment AND re-finance, it would be a 94% increase (which is nearly double).
Everyone's situation is unique. But I would highly recommend that you talk to your parents about re-financing. It doesn't always make sense to re-finance, but right now it makes A LOT of sense. Be sure to get a fixed-rate mortgage since rates are so low right now, you want to lock them in. And try to combine both mortgages. The bank will offer a lower combined interest rate and the temptation would be to pay the subsequent lower payment amount that the bank offers. Instead of paying that lower amount, convince your parents to pay the same they are paying now. This will essentially offer that extra payment amount that has such a significant impact on speed of loan pay-off. Any extra they can offer on top (even $50) goes a long way towards accelerating the loan payoff. In fact, you could even offer that they simply follow these tricks for 1 year and it could possibly get them at least out from under their loan in a year. Then they might still owe on it, but could resume a less-aggressive payoff model once they know they have plenty of positive equity on the home. They could settle back on the lower payment offered by the lower interest rate thanks to refinancing.
First, you can always re-finance. And right now is actually a good time to re-finance, because interest rates just dropped. They could get a low APR fixed-rate Mortgage right now if they can re-qualify. The benefit of re-financing is that you could combine your Home Equity Loan (which is usually higher interest than a traditional mortgage) and your outstanding mortgage into one new payment plan. This would be most likely at a much lower combined interest than your parents are seeing right now. Interest rates right now are exceptionally low with the pandemic, so locking in a fixed-rate mortgage at these low APRs will go a long way in helping your parents pay down the balance of the loan faster, while making the exact same payment as they are right now. This is because less of the monthly payment goes towards interest.
Second, make extra payments each month. Even a hundred bucks or so, adds up quickly. For example. Let's say they owe $200,000 on the home on a 3.5% APR loan. They probably make payments in the ballpark of $1,200 a month on that amount.
On these figures, they are paying approximately 0.3% interest each month on the principal ($200,000). That is $600 a month in interest. This could be even higher if you factor in a higher APR from the Home Equity Line of Credit (probably 4.5-5% APR, or 0.4% a month). That means the Home Equity Line might be paying as much as $800 a month in interest. Let's split the difference and say half the home value is under the Home Equity Line and the other half of the value is under the first Mortgage. That's $700 a month that goes towards interest. So of their $1,200 payment each month that leaves their bank account, only $500 actually goes towards their home.
As you can see, if they just wait until next month they will again pay $700 in interest and $500 towards principal (This scale crosses over time as you lower your principal). So if they instead increase their payment just $100 a month, from $1,200 to $1,300 then they still pay the same $700 in interest, but this time $600 will go towards principal. That is a 20% increase in the speed of paying off your home with just an extra $100 a month. That also means that your principal lowers faster, which in turn lowers your interest payments (since they are based off principal) for future month. This creates a positive "Snowball" effect for your parents, quickly accelerating the speed of home ownership with a very small (additional) sacrifice per month.
Under the same example, imagine if they put $200 more per month towards it. This would be paying the house principal off at $700 a month instead of $500 a month, a 40% increase! On a 30 year mortgage, paying an extra $200 a month could mean paying off your home more than A DECADE EARLIER! The effects are incredible.
Now imagine that they DON'T have an extra $100 a month. You can have the same effect by simply refinancing your home and combining both mortgages into a single, low APR mortgage, offered right now with low interest rates of the pandemic. They could secure a 2.6% APR loan combined across both mortgages.
On a 2.6% APR mortgage they would be paying only $433 in interest each month instead of $700 (assuming the same $200,000 outstanding balance figure as before). That is an additional $267 a month that goes towards the home principal each month by making the same $1,200 payment that they were already making before. So instead of $500 a month going to principal, they would be paying $767 per month towards principal. That is a 53% increase in the amount going towards paying off your home! All while making the same payment as they are already making.
Now for the grand finale, imagine that they re-financed AND they added $100 a month to their payment. This would mean they are paying off $867 a month towards their principal, which is 73% increase in their loan payoff. If they were to add $200 a month to their payment AND re-finance, it would be a 94% increase (which is nearly double).
Everyone's situation is unique. But I would highly recommend that you talk to your parents about re-financing. It doesn't always make sense to re-finance, but right now it makes A LOT of sense. Be sure to get a fixed-rate mortgage since rates are so low right now, you want to lock them in. And try to combine both mortgages. The bank will offer a lower combined interest rate and the temptation would be to pay the subsequent lower payment amount that the bank offers. Instead of paying that lower amount, convince your parents to pay the same they are paying now. This will essentially offer that extra payment amount that has such a significant impact on speed of loan pay-off. Any extra they can offer on top (even $50) goes a long way towards accelerating the loan payoff. In fact, you could even offer that they simply follow these tricks for 1 year and it could possibly get them at least out from under their loan in a year. Then they might still owe on it, but could resume a less-aggressive payoff model once they know they have plenty of positive equity on the home. They could settle back on the lower payment offered by the lower interest rate thanks to refinancing.
How much of this is market forces in general, and how much of it is market forces combined with Wells Fargo's balance sheet limits that it has because of past misdeeds.
would you loan money into this kind of uncertainty?
i think this is a very rational decision for a bank to take.
(hate for the banks aside, i would do the same thing..)
(hate for the banks aside, i would do the same thing..)
> would you loan money into this kind of uncertainty?
If it wasn't my money and my bonus depended on my loan volume, even if I suspect many will blow up in 5 years? 2008.
If it wasn't my money and my bonus depended on my loan volume, even if I suspect many will blow up in 5 years? 2008.
Into the general economic uncertainty? Sure, for the right price. I think it's possible at this point to make reasonable predictions about how bad things are likely to get. Their action seems to imply they think the real estate market is particularly uncertain - that they can't put a useful lower bound on housing prices.
The cynic in me is thinking that Wells Fargo is doing this to force foreclosures. Do you really think that real estate is going to drop by 80%?
For the right kind of rate and with the right collateral, you bet I would.
For home loans, the collateral is the house, which is strange because the house doesn't truly belong to the borrower until the loan is paid off. Deeper still, the conditions where home loans are risky are the same conditions where home prices are risky.
In the extreme, a home buyer borrows a million dollars to buy an expensive house, the economy tanks before the first payment, the borrower walks away, and the bank gets a house worth $400K.
I'm not sure the "right collateral" even exists for home loans, it's a weird case where the "collateral" is the item being purchased on credit instead of something the borrower actually has.
In the extreme, a home buyer borrows a million dollars to buy an expensive house, the economy tanks before the first payment, the borrower walks away, and the bank gets a house worth $400K.
I'm not sure the "right collateral" even exists for home loans, it's a weird case where the "collateral" is the item being purchased on credit instead of something the borrower actually has.
Banks generally don't extend HELOCs beyond a borrower's equity in the house, which is the fractional value of the house the borrower truly owns.
They are basically a flexible cash-out second mortgage.
> In the extreme, a home buyer borrows a million dollars to buy an expensive house, the economy tanks before the first payment, the borrower walks away, and the bank gets a house worth $400K.
You've just described ordinary mortgage risk, in no-recourse states. In recourse states, the bank can go after the borrower for the remaining balance of the loan ($600k). Generally if a bank was willing to lend $1 million to someone, they had reasonably high credit and cash flow at origination time (debt-to-income ratio, non-conventional jumbo loan). They may not get their $600k back, and in no-recourse states they will get $0 back, but that is priced in to the interest rate of the loan.
They are basically a flexible cash-out second mortgage.
> In the extreme, a home buyer borrows a million dollars to buy an expensive house, the economy tanks before the first payment, the borrower walks away, and the bank gets a house worth $400K.
You've just described ordinary mortgage risk, in no-recourse states. In recourse states, the bank can go after the borrower for the remaining balance of the loan ($600k). Generally if a bank was willing to lend $1 million to someone, they had reasonably high credit and cash flow at origination time (debt-to-income ratio, non-conventional jumbo loan). They may not get their $600k back, and in no-recourse states they will get $0 back, but that is priced in to the interest rate of the loan.
> Banks generally don't extend HELOCs beyond a borrower's equity in the house, which is the fractional value of the house the borrower truly owns.
For a house worth $1MM in February and a first mortgage loan balance of $700K, it sure looks like the borrower has $300K in equity in the house.
If the economy, job market, and housing market evolve such that the house becomes worth $600K a year from now, how much equity does the borrower have at that point?
For a house worth $1MM in February and a first mortgage loan balance of $700K, it sure looks like the borrower has $300K in equity in the house.
If the economy, job market, and housing market evolve such that the house becomes worth $600K a year from now, how much equity does the borrower have at that point?
What responsive argument or clarification are you trying to make with the rhetorical question about negative equity?
That what appears to be equity today may not be there tomorrow, which makes it sensible for banks to not lend on HELOCs up to the amount of today's (apparent) equity.
You're just describing the ordinary risk that comes with lending against collateral. Banks evaluate that risk and price it in all the time.
What I think most likely happened is that banks plugged their (new, very high) risk level into their interest rate formulas, got very high rates (imagine 10-20%) and decided it would be worse, for publicity, revenue, or other reasons, to lend at those rates rather than halt HELOC origination entirely.
What I think most likely happened is that banks plugged their (new, very high) risk level into their interest rate formulas, got very high rates (imagine 10-20%) and decided it would be worse, for publicity, revenue, or other reasons, to lend at those rates rather than halt HELOC origination entirely.
It sounds like we’re agreeing with each other.
Yes, I agree, if the borrower is overleveraged, it wouldn't very wise for a lender to make these loans.
Let me throw this alternative out there. Let's say that you have a million dollar home that is paid in full(no mortgage or any other liens on the property.) You decided that given the uncertainty, you want to make sure you have a years worth of expenses in cash. The lender decides that they will lend you 100k (only 10% of the value of the home) at 2%(well above the fed rate which is near zero) as long as you agree to a lien on the property. Even if the home loses half of its value the lender will still be made whole.
Let me throw this alternative out there. Let's say that you have a million dollar home that is paid in full(no mortgage or any other liens on the property.) You decided that given the uncertainty, you want to make sure you have a years worth of expenses in cash. The lender decides that they will lend you 100k (only 10% of the value of the home) at 2%(well above the fed rate which is near zero) as long as you agree to a lien on the property. Even if the home loses half of its value the lender will still be made whole.
> For home loans, the collateral is the house, which is strange because the house doesn't truly belong to the borrower until the loan is paid off.
Your thinking is circular - the house doesn't truly belong to the borrower exactly because it's the collateral of the loan. Nothing strange about it.
Your thinking is circular - the house doesn't truly belong to the borrower exactly because it's the collateral of the loan. Nothing strange about it.
It is the self-collateralization that is circular, not my thinking! Not all credit markets work like this; instead expecting as collateral something you actually own, and making margin calls when the value of that collateral falls.
Chances are the house will be worth ten millions, but those ten millions won't be much after the global corona compensation money printing spree and the 1.x million the borrower pays will be worth nothing. The borrower being forced to walk away would be a best case outcome for the bank in a high inflation scenario.
Well, that's unfortunate but understandable. It seems like the Fed should be buying up home equity loans, to offload the risk?
A universal basic income would be best, but short of that, more consumer loans would be useful. And better if they only need to be paid back when you're making money.
A universal basic income would be best, but short of that, more consumer loans would be useful. And better if they only need to be paid back when you're making money.
This makes perfect sense. Why let people get deeper in debt and risk their houses?
Oh silly... Wells Fargo doesn't make these decisions to protect YOU, the consumer. They do it because it is too risky for THEM.
Look at the last housing crash. The crash was caused by banks offering people loans that they knew would most likely default. They offered people more money than they could afford to pay. If the bank was looking out for your best interest they would have told millions of Americans "no" on their mortgage applications. But the bank knew that they could sell your loan off before you defaulted and make it someone else's problem. It gets more complicated than that obviously, but the crash was caused by the banks knowingly extending bad loans. The banks are looking out for themselves, not you.
Look at the last housing crash. The crash was caused by banks offering people loans that they knew would most likely default. They offered people more money than they could afford to pay. If the bank was looking out for your best interest they would have told millions of Americans "no" on their mortgage applications. But the bank knew that they could sell your loan off before you defaulted and make it someone else's problem. It gets more complicated than that obviously, but the crash was caused by the banks knowingly extending bad loans. The banks are looking out for themselves, not you.
This has nothing to do with protecting customers. People should be allowed to do, almost, whatever dumb things they want with their money. This is about protecting the bank's balance sheet.
No because then the Government/Taxpayers will be needed to bail them out, just like the 2008 crash. People who bought houses they couldn't possibly have ever afforded were given all the credit they wanted, and were bailed out by the government. (For example, they were exempted from paying income tax on forgiven debt.)
There were some utterly ridiculous loan products available in the early-mid 2000s. The crash came because people who wanted to refinance out of those loans couldn't.
Edit: Of course, they were dumb for signing up for those loans in the first place. But the brokers who sold people those loans were straight up loan sharks.
Edit: Of course, they were dumb for signing up for those loans in the first place. But the brokers who sold people those loans were straight up loan sharks.
Protecting the shareholders from unnecessary risk. It's win-spin-win.
>People should be allowed to do, almost, whatever dumb things they want with their money.
Are you saying that a bank should make irresponsible loans for people that make irresponsible decisions?
Are you saying that a bank should make irresponsible loans for people that make irresponsible decisions?
I'm not convinced that taking out a HELOC now would be irresponsible in all cases. Let's say that you are 80% into your mortgage. You lost your job in March bc of COVID-19. Your next three mortgage payments are coming due in June and you still don't have an income. A HELOC would be a good way to push off a foreclosure. If you can't come up with those 4 months of mortgage payments you will be giving up the 60% equity you built up in your home.
No. The bank should maximize shareholder value and not do that, which is what is happening. But we should let anyone write a check and invest in a startup, or buy certain products considered unsavory by the masses.
This is correct.
warranty(1)
[deleted]
This follows a similar move by JP Morgan Chase:
> Due to the economic uncertainty created by COVID-19, we’re temporarily not accepting applications for new home equity lines of credit (HELOC). This will protect both you and the bank.
https://www.chase.com/content/chase-ux/en/personal/home-equi...
From Wikipedia:
> A HELOC differs from a conventional home equity loan in that the borrower is not advanced the entire sum up front, but uses a line of credit to borrow sums that total no more than the credit limit, similar to a credit card. HELOC funds can be borrowed during the "draw period" (typically 5 to 25 years). ...
https://en.wikipedia.org/wiki/Home_equity_line_of_credit
This has two main implications:
1. Two major banks are now worried about consumer solvency (and/or real estate prices) to the degree that they're forgoing HELOC origination profits across the board. An alternative response could have been to simply raise interest rates on these loans. The fact that the loans were suspended suggests a lot more afoot than meets the eye. Those suggesting to "cash-out refi instead" may be surprised to find in the coming weeks that these loans have also been terminated, or saddled with terms that make them unattractive.
2. Consumers who were planning to tap home equity to pay for monthly expenses will not be able to do so.
This could spell a lot of trouble moving forward. US consumers view their homes as a kind of ATM, dispensing dollars on demand through HELOCs. That money can be used for literally anything.
Without an easy source of credit to tap, where will the American consumer turn? In increasing order of existential risk:
1. Sale of big-ticket property (houses, boats, cars, cutting short college degrees).
2. Credit cards
3. Payday loans
4. Default on other loans
5. Bankruptcy protection
These options magnify bad decisions made in the past. Selling big-ticket items drives down the market price of the underlying assets, which leads to more distress, and so on.
Credit cards and payday loans charge indefensibly-high interest rates that can easily lead consumers further down the ladder of insolvency.
Bankruptcy filings destroy money by wiping loans off the balance sheets of banks. Banks respond by tightening lending standards, which drives the cycle further down.
How will employers likely respond?
1. Hiring freezes
2. Pay cuts (nominal or real, through increased employee contributions to health care plans)
3. Bankruptcy
All of these things, from stress on consumers to pressure on businesses, are deflationary. Expect the value of cash to increase compared to the value of stuff.
How to approach what lies ahead? If you're in debt, get out now. Then stay out. Deflation wipes out debtors as they're forced to pay back loans with ever-appreciating dollars.
> Due to the economic uncertainty created by COVID-19, we’re temporarily not accepting applications for new home equity lines of credit (HELOC). This will protect both you and the bank.
https://www.chase.com/content/chase-ux/en/personal/home-equi...
From Wikipedia:
> A HELOC differs from a conventional home equity loan in that the borrower is not advanced the entire sum up front, but uses a line of credit to borrow sums that total no more than the credit limit, similar to a credit card. HELOC funds can be borrowed during the "draw period" (typically 5 to 25 years). ...
https://en.wikipedia.org/wiki/Home_equity_line_of_credit
This has two main implications:
1. Two major banks are now worried about consumer solvency (and/or real estate prices) to the degree that they're forgoing HELOC origination profits across the board. An alternative response could have been to simply raise interest rates on these loans. The fact that the loans were suspended suggests a lot more afoot than meets the eye. Those suggesting to "cash-out refi instead" may be surprised to find in the coming weeks that these loans have also been terminated, or saddled with terms that make them unattractive.
2. Consumers who were planning to tap home equity to pay for monthly expenses will not be able to do so.
This could spell a lot of trouble moving forward. US consumers view their homes as a kind of ATM, dispensing dollars on demand through HELOCs. That money can be used for literally anything.
Without an easy source of credit to tap, where will the American consumer turn? In increasing order of existential risk:
1. Sale of big-ticket property (houses, boats, cars, cutting short college degrees).
2. Credit cards
3. Payday loans
4. Default on other loans
5. Bankruptcy protection
These options magnify bad decisions made in the past. Selling big-ticket items drives down the market price of the underlying assets, which leads to more distress, and so on.
Credit cards and payday loans charge indefensibly-high interest rates that can easily lead consumers further down the ladder of insolvency.
Bankruptcy filings destroy money by wiping loans off the balance sheets of banks. Banks respond by tightening lending standards, which drives the cycle further down.
How will employers likely respond?
1. Hiring freezes
2. Pay cuts (nominal or real, through increased employee contributions to health care plans)
3. Bankruptcy
All of these things, from stress on consumers to pressure on businesses, are deflationary. Expect the value of cash to increase compared to the value of stuff.
How to approach what lies ahead? If you're in debt, get out now. Then stay out. Deflation wipes out debtors as they're forced to pay back loans with ever-appreciating dollars.
Interesting. This kind of resembles the crisis of 2008, when banks have produced too many subprime loans. It looks like WF tries to get them off their books while it still can. Or at least not make new ones.
Not in any way does this resemble 2008. WF is not originating new loans because essentially all consumers suddenly have terrible looking credit and WF doesn't want to take on that risk.
Consumers have normal looking credit because the credit scores are lagging behind. It's smart to wait until the credit scores actually reflect reality instead of showing a rosy picture right before everyone starts defaulting at the same time.
I think we agree but I was less clear than I could have been in the grandparent comment. When I say "consumers suddenly have terrible looking credit," I don't mean FICO credit scores. Those remain, as you suggest and I agree, mostly unaffected, as they are a lagging indicator.
Banks are not fools, however, and they understand that there is more to consumer credit risk than FICO scores, especially in this kind of turmoil and economic contraction.
Banks are not fools, however, and they understand that there is more to consumer credit risk than FICO scores, especially in this kind of turmoil and economic contraction.
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-...