Hocking the house for quick cash is a lot harder than it used to be, and it's causing headaches for homeowners, banks and the economy.
During the housing boom, millions of people borrowed against the value of their homes to remodel kitchens, finish basements, pay off credit cards, buy TVs or cars, and finance educations. Banks encouraged the borrowing, touting in ads how easy it is to unlock the cash in their homes to "live richly" and "seize your someday."
Now, the days of tapping your house for easy money have gone the way of soaring home prices. A quarter of all homeowners are ineligible for home equity loans because they owe more on their mortgage than what the house is worth. Those who have equity in their homes are finding banks far more stingy. Many with home-equity loans are seeing their credit limits reduced dramatically.
The sharp pullback is dragging on the economy, household budgets and banks' books. And it's another sign that the consumer spending binge that powered the economy through most of the decade is unlikely to return anytime soon.
At the peak of the housing boom in 2006, banks made $430 billion in home equity loans and lines of credit, according to the trade publication Inside Mortgage Finance. From 2002 to 2006, such lending was equal to 2.8 percent of the nation's economic activity, according to a study by finance professors Atif Mian and Amir Sufi of the University of Chicago.
For the first nine months of 2009, only $40 billion in new home equity loans were made. The impact on the economy: close to zero.
"The home as ATM is yesterday," says Keith Gumbinger, vice president of HSH Associates Financial Publishers, which publishes consumer loan information.
Millions of homeowners borrowed from the house to improve their standard of living. Now, unable to count on rising home values to absorb more borrowing, indebted homeowners are feeling anything but wealthy.
Holly Scribner, 34, and her husband took out a $20,000 home equity loan in mid-2007 — just as the housing market began its swoon. They used the money to replace sinks and faucets, paint, buy a snow blower and make other improvements to their home in Nashua, N.H.
The $200 monthly payment was easy until property taxes jumped $200 a month, the basement flooded (causing $20,000 in damage) and the family ran into other financial difficulties as the recession took hold. Their home's value fell from $279,000 to $180,000. They could no longer afford to make payments on either their first $200,000 mortgage or the home equity loan.
Scribner, who is a stay-at-home mom with three children, avoided foreclosure by striking a deal with the first mortgage lender, HSBC, which agreed to modify their loan and reduce payments from $1,900 a month to $1,100 a month. The home equity lender, Ditech, refused to negotiate. Scribner's husband, Scott, works at an auto loan financing company but is looking for a second job to supplement the family's income.
The family is still having trouble making regular payments on the home-equity loan. The latest was for $100 in November.
"It was a huge mess. I ruined my credit," Holly Scribner says. "We did everything right, we thought, and we ended up in a bad situation."
It's a mess for the banking industry, too.
Home equity lending gained popularity after 1986, the year Congress eliminated the tax deduction for interest on credit card debt but preserved deductions on interest for home equity loans and lines of credit. Homeowners realized it was easier or cheaper to tap their home equity for cash than to use money taken from savings accounts, mutual funds or personal loans to fund home improvements.
Banks made plenty of money issuing these loans. Home equity borrowers pay many of the costs associated with buying a home. They also may have to pay annual membership fees, account maintenance fees and transaction fees each time a credit line is tapped.
In 1990, the overall outstanding balance on home equity loans was $215 billion. In 2007, it peaked at $1.13 trillion. For the first nine months of 2009, it's at $1.05 trillion, the Federal Reserve said. Today, there are more than 20 million outstanding home equity loans and lines of credit, according to First American CoreLogic.
But delinquencies are rising, hitting record highs in the second quarter. About 4 percent of home equity loans were delinquent, and nearly 2 percent of credit lines were 30 days or more overdue, according to the most recent data available from the American Bankers Association.
A rise in home-equity defaults can be particularly painful for a bank. That's because the primary mortgage lender is first in line to get repaid after the home is sold through foreclosure. Often, the home-equity lender is left with little or nothing.
Banks are applying the brakes.
Bank of America, for example made about $10.4 billion in home equity loans in the first nine months of the year — down 70 percent from the same period last year, spokesman Rick Simon says. The also started sending letters freezing or cutting lines of credit last year, and will disqualify borrowers in areas where home prices are declining.
"This was just solid risk management," he says.
Jeffrey Yellin is in the middle of remodeling his kitchen, dining room, living room and garage at his home in Oak Park, Calif. He planned to pay for the project with his $200,000 home equity line of credit, which he took out in January 2007 when his house was valued at $750,000.
In October, his lender, Wells Fargo, sent a letter informing him that his credit line was being cut to $110,000 because his home's value had fallen by $168,000, according to the bank.
He is suing the bank, alleging it used unfair standards to justify its reduction, incorrectly assessed the property value, failed to inform customers promptly and used an appeals process that is "oppressive." Jay Edelson, a lawyer in Chicago who is representing Yellin, says homeowners are increasingly challenging such letters in court. He says he's received 500 calls from upset borrowers.
Wells Fargo declined to comment on Yellin's lawsuit but said it reviews of customers' home equity lines of credit to make sure that account limits are in line with the borrowers' ability to repay and the value of their homes.
"We do sometimes change our decisions when the customer provides sufficient additional information," Wells Fargo spokeswoman Mary Berg said in a statement e-mailed to The Associated Press.
Work has stopped at the Yellin's home. The backyard, used as a staging area for the remodeling job, is packed with materials and equipment.
"Now, I've got a backyard that looks like 'Sanford and Son' almost," he says.
NEW YORK – The government has handed its ATM card to beleaguered mortgage giants Fannie Mae and Freddie Mac.
The Treasury Department said Thursday it removed the $400 billion financial cap on the money it will provide to keep the companies afloat. Already, taxpayers have shelled out $111 billion to the pair, and a senior Treasury official said losses are not expected to exceed the government's estimate this summer of $170 billion over 10 years.
Treasury Department officials said it will now use a flexible formula to ensure the two agencies can stand behind the billions of dollars in mortgage-backed securities they sell to investors. Under the formula, financial support would increase according to how much each firm loses in a quarter. The cap in place at the end of 2012 would apply thereafter.
By making the change before year-end, Treasury sidestepped the need for an OK from a bailout-weary Congress.
While most analysts say the companies are unlikely to use the full $400 billion, Treasury officials said they decided to lift the caps to eliminate any uncertainty among investors about the government's commitments. But the timing of the announcement on a traditionally slow news day raised eyebrows.
"The companies are nowhere close to using the $400 billion they had before, so why do this now?" said Bert Ely, a banking consultant in Alexandria, Va. "It's possible we may see some horrendous numbers for the fourth quarter and, thus 2009, and Treasury wants to calm the markets."
Fannie Mae and Freddie Mac provide vital liquidity to the mortgage industry by purchasing home loans from lenders and selling them to investors. Together, they own or guarantee almost 31 million home loans worth about $5.5 trillion, or about half of all mortgages. Without government aid, the firms would have gone broke, leaving millions of people unable to get a mortgage.
The biggest headwind facing the housing recovery has been the rise in foreclosures as unemployment remains high. The two companies, facing mounting losses from mortgage defaults, were taken over by the government in September 2008 under the authority of a law Congress passed in the summer of 2008.
So far the government has provided $60 billion to Fannie Mae and $51 billion to Freddie Mac. The assistance is being provided in exchange for preferred stock paying a 10 percent dividend. The Bush administration first pledged up to $100 billion in support for each company, an amount that was doubled to $200 billion for each by the Obama administration in February.
Treasury officials will provide an updated estimate for Fannie and Freddie losses in February when President Barack Obama sends his 2011 budget to Congress. Though the administration has yet to disclose its long-term plans for the two companies, they are unlikely to return to their former power and influence.
The news followed an announcement Thursday that the CEOs of Fannie and Freddie could get paid as much as $6 million for 2009, despite the companies' dismal performances this year.
Fannie's CEO, Michael Williams, and Freddie CEO Charles "Ed" Haldeman Jr. each will receive $900,000 in salary, $3.1 million in deferred payments next year and another $2 million if they meet certain performance goals, according to filings with the Securities and Exchange Commission.
The pay packages were approved by the Treasury Department and the Federal Housing Finance Agency, which regulates Fannie and Freddie.
That pay is far less than what their predecessors earned. Former Fannie CEO Daniel Mudd received $10.2 million in 2008 and former Freddie CEO Richard Syron pocketed $13.1 million. Both execs were ousted when federal regulators seized the companies in September 2008. The federal government blocked exit packages for the pair worth up to $24 million.
The chief executives' pay could spark new criticism about the government's numerous bailouts, but that may be unfounded, said Mark Borges, principal with management consulting firm Compensia.
Haldeman and Williams each could command between $5 million and $10 million in a similar position in the private sector, Borges estimated, and without the notable challenges and public scrutiny they face at these companies.
"I doubt too many people would look at these jobs and say, 'Gosh, I would love to go there for my next career move,'" Borges said. "The government is getting top notch executives to solve problems that are not easy to solve."
The bulk of their pay is also not guaranteed, Borges said, so these executives can't pocket and run and must meet certain long-term goals or risk giving some of it back.
Freddie Mac's board sets the performance goals for the chief executive, which won't be disclosed until next year. Fannie Mae's filing outlined its corporate goals including "being a recognized leader in the housing recovery," "protecting taxpayers," and "managing risk more effectively."
Fannie Mae and Freddie Mac declined to offer further details on CEO performance goals.
Public anger over Wall Street pay boiled over earlier this year. In response, the Obama administration imposed pay curbs on banks that received government bailouts. All the major banks have since repaid their federal money, largely to escape caps on executive pay.
Former Bank of America Corp. CEO Ken Lewis, for example, agreed to forgo his salary and bonus this year under pressure from the government. Last year, he pocketed more than $9 million in total compensation. Bank of America received $45 billion in government assistance, which it has since repaid.
Freddie Mac hired Haldeman, a former mutual fund executive, in July. At the time, the company disclosed his annual salary of $900,000 but did not disclose other incentive payments. In September, the company hired a new chief financial officer, Ross Kari, and said his pay package would be worth up to $5.5 million.
Williams, formerly Fannie Mae's chief operating officer, took over as CEO in April after the first government-appointed CEO, Herbert Allison, took a job at the Treasury Department. Williams earned a base salary of $676,000 last year, plus a retention award of $260,000.
Washington-based Fannie Mae was created in 1938 in the aftermath of the Great Depression. It was privatized 30 years later to limit budget deficits during the Vietnam War. In 1970, the government formed its sibling and competitor McLean, Va.-based Freddie Mac.
AP Real Estate Reporter Alan Zibel and AP Economics Writer Martin Crutsinger in Washington contributed to this report.
TOKYO (Reuters) –
Japan approved on Friday a record budget for next year that will inflate the country's already huge debt by $484 billion, as the prime minister vowed to battle on in the face of a growing scandal and sliding poll ratings.
With tax revenues sliding since the financial crisis erupted, the government has ditched a key campaign pledge to voters and tapped cash reserves to limit new borrowing at 44.3 trillion yen, a level already worrying bond markets as public debt nears 200 percent of GDP.
Prime Minister Yukio Hatoyama faces an upper house election next year so some analysts say his coalition may yet be tempted to spend more to prop up the economy, which has only recently emerged from Japan's worst recession since World War Two.
Hatoyama, whose Democratic Party ousted its long-dominant conservative rival in August, repeated his determination to stay on the job despite Thursday's indictment of two former close aides over false political funding records.
"I would like to brace myself, correct what needs to be corrected, and do my best," Hatoyama told reporters on Friday, the 101st day of his administration.
"The Japanese people may still think it is hardly possible for me to have not known (about the incident) but I told everything honestly, and I hope they will understand as much as possible."
Japanese media, however, said Hatoyama -- Japan's fourth prime minister in three years -- might have to quit if voters find his explanations and his leadership weak.
The Democrats took power pledging to put policy-making in the hands of politicians rather than bureaucrats, eradicate wasteful spending, and focus spending on consumers instead of the more business-focused policies of the ousted Liberal Democratic Party.
But polls show voter support for the government sliding below 50 percent from initial highs over 70 percent, as doubts have grown about Hatoyama's ability to make tough decisions on the economy and diplomacy.
As well, concern simmers that political mastermind Ichiro Ozawa, a former leader and now the Democrats' No. 2 executive, is running the show.
Caught between campaign pledges to give more cash to consumers to boost growth and the reality of plunging tax revenues, Hatoyama has jettisoned a key pledge to cut petrol taxes.
Hatoyama has said he would keep another promise to pay child allowances to households regardless of income levels.
"Although cuts in public works spending are planned, they are likely to be more than offset by child allowances. Overall, the budget will likely give a slight positive effect on the economy," said Yuichi Kodama, an economist at Meiji Yasuda Life Insurance.
"Rather than keeping campaign pledges, it was more important for the government to reduce its spending as Japan's fiscal conditions are reaching limits."
Finding funds to pay for costly spending programs is expected to become more difficult, since tapping cash from special reserves is only a short-term solution.
Finance officials said about 10.6 trillion yen in such reserves would be used to balance next year's 92.3 trillion yen budget.
The government forecasts economic growth of 1.4 percent in 2010/11, which would be the first increase in three years, but analysts say policymakers need a plan to achieve sustainable growth.
Media polls before the indictment of Hatoyama's aides showed most voters felt that Hatoyama need not resign over the affair, which included the receipt of large amounts of money from his mother, daughter of the founder of tire maker Bridgestone Corp
But sagging ratings would undermine the Democrats' chances of winning an upper house election in mid-2010, leaving them dependent on two tiny coalition partners whose conflicting views make policy-making messy. A loss could create a policy deadlock, since the upper chamber can delay bills.
Hatoyama has long been a critic of political corruption and has said in the past that lawmakers should quit if aides were guilty of misdeeds.
On Thursday, he left the door open to changing his mind and resigning but said that, for now, he believed quitting would betray voters' hopes.
"Precisely so," said the Nikkei daily in a commentary.
"The question is whether he can demonstrate leadership to carry out policies. What voters have given the prime minister is a moratorium."
(Additional reporting by Yoko Nishikawa, Rie Ishiguro and Hideyuki Sano; Writing by Linda Sieg; Editing by Rodney Joyce)