Possible stress points in the consumer leverage daisy chain:
When you analyze the giant purchase and refi booms that started basically about Sept. 2001 one can see successive waves of creditor strategies.
Sept. 2001- Nov.2001: was mostly done at 6-6.25% fixed 30 year, only about 10% ARMs.
In the monster Aug, 2002-July 2003 wave, ARMS jumped to 12-14%, but mostly fixed were done at 5-5.25% rates.
Interestingly, the boomlet from Jan, 2004- to the end of March, saw ARMS jumping to 25-30%, even with fixed available at 5.25-5.50%.
So it would appear that almost all homeowners refied or purchased during 2001-present at fixed rates between 5.00-6.25%. Given the lower rates available on ARMs, it would seem logical that many of the more aggressive serial financiers, or those trying to purchase, elected to come out of 5.75%-6.00% type fixed rates, and try their luck with ARMs. If they are 3 year ARM, then one could project early 2007 as the severe stress point should rates tick up. How many are one year, and teaser rates? I wonder though if the other strategy for the folks who don't want to gamble with ARMs and who choose to keep their 5.5 or 5.75 fixed rates, is to instead maintain their standards of living with add on HELOCs. Note that one is variable daily , and seems to have become a huge market in the last year. HELOCs, home equity and the recent surge this year in ARMS is a time bomb, especially for those who have taken on large loans. I'd be real interested in the aggregate totals on those now, especially in the extreme bubble states like California. Contrary Investor in the 4/15 issue has a chart showing "revolving home equity loans as % of total bank residential lending": It was 7% in 2000, 11% in 2003, and is now over 13%.
CI on revolving real estate loans:
"It's a bit ironic that a good number of banks that shed their consumer credit card operations many moons ago have jumped with both feet into revolving real estate backed loans and lines of credit. In fact, now to the point where HELOC's are accessed in the form of a "credit card", so to speak. One can now increase their home equity loan by swiping a card through the reader at any retail check-out counter. How convenient. We ask you, what are home equity lines and HELOC's if not another form of revolving consumer credit? Whether the banks want to admit it to themselves or not, they are wholeheartedly back in the business of revolving consumer credit. Just this go around their supposed collateral is second position in the mortgage food chain of title. Not a hell of a lot of comfort in an inflated asset price environment if you ask us. Moreover, by exiting the primary residential mortgage underwriting business (where mortgages originated were held as assets), they have now implicitly accepted a rate of return on second position real estate lending often 150 to 200-plus basis points below fixed mortgage debt yields of the moment. (Home equity lines are usually tied to prime, etc., which is far below 30 year fixed mortgage rates at present.) Let's see if we've got this straight. The US banking system approach to residential real estate lending over the past half decade to decade has conceptually been to accept lower yields (HELOC's) for a subordinated collateral position. Sounds like a new era in banking if we've ever seen one. As you'll see below, growth in this new era form of bank lending has been on fire since the stock market bubble made its first popping sounds four years back."
HELOCs (rate variable, tied to prime rate):
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