The Return of the HELOC

"If one considered life as a simple loan, one would perhaps be less exacting.  We possess actually nothing; everything goes through us." - Eugene Delacroix

Back in the heyday of the housing bubble HELOCs (home equity lines of credit) were used as a type of a cash machine by the consumer.  For six years over $110 billion dollars a year was withdrawn from the equity of houses.  Consumers viewed it as money that was theirs and spent it freely creating a massive surge for consumer goods and services.  Banks wanting to make money (as always) piled into the fray and issued HELOCs up to 125 percent of the value of the homeowner's residence.  The thought was that the price of housing would never go down so this money was safe.

Well when the bubble in housing burst these HELOCs resulted in homeowners losing their houses as suddenly they owed far more than the house was worth.  In addition without the support of a consumer willing to spend money the economy itself contracted and the homeowner was suddenly out of a job.  The spiral started as quickly as it had begun and the rest as they say is history.

Six years later banks are still dealing with the mess.  To date they have written off more than $4 billion in debt and there is still a long way to go.  As an example assume that the total debt on the house is $500,000 and the value of the house is $400,000, on paper the bank has lost $100,000 but it is always worse than that.  First you have to reduce the value to the bank by the agent commissions and closing costs and then there may be other liens such as HOA and taxes.  All in all the bank would be lucky in this example to net $350,000 a 50% increase in the loss!

Given this backdrop I was surprised to read that 2012 is expected to see a 30 percent rise in HELOCs.  The estimate is that just under $80 billion in debt will be offered to homeowners through HELOCs this year.  Furthermore it is expected that 2013 will see over $110 billion issued in HELOC debt, more than the average issued during the housing bubble.  This will definitely have an impact on consumer liquidity and should result in decent consumer spending growth however I wonder if this rise in HELOC debt is a good thing.

Certainly lenders will have far stricter criteria for issuing a HELOC than before and there is over $7.3 trillion in home equity in the United States so the amount lent in HELOC loans is small.  In addition the rates attached to the loans are very attractive so the question remains where will the proceeds be invested?

During the housing bubble consumers spent money on everything from upgrading their house to buying boats and overseas trips.  It was one big party funded by the banks.  Looking around now there are opportunities to invest into real estate, private equity and a few select stocks however outside of this the investment world is very tentative.  In most cases a homeowner's house is their largest asset so it needs to be treated with care. 

There is the thought that you can get the HELOC and keep it for emergencies and I am sure that a decent amount of this money will be used for that purpose.  Outside of this I am hopeful that the remaining proceeds are being put to good use and invested wisely as if anything was learnt during the housing bubble it was that spending it on a big Holiday Season will not end in Ho Ho Ho but rather with a No No No.  From me to you have a very Happy Holiday!