
Wells Fargo temporarily suspending applications for home-equity lines of credit - garraeth
https://www.wellsfargo.com/equity/line-of-credit-details/
======
jacurtis
The significance of this announcement (and why I am assuming OP posted it), is
not to let us know that we can't get home equity lines, but instead showing it
as a signal that one of the largest mortgage providers in the world is worried
about future home/land 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. 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-...](https://www.housingwire.com/articles/41539-here-are-the-
top-10-lenders-dominating-the-mortgage-market/)

~~~
ISL
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.

~~~
anoncareer0212
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

~~~
caseysoftware
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.

~~~
nostrademons
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.

~~~
caseysoftware
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. ;)

~~~
ashtonkem
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.

------
brianwawok
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.

~~~
joeax
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.

~~~
duxup
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.

~~~
silverreads
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.

------
toomuchtodo
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.

~~~
amiga_500
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.

~~~
kyleblarson
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.

~~~
amiga_500
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.

~~~
toomuchtodo
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.

~~~
scarface74
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.

~~~
twomoretime
>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.

~~~
scarface74
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?

~~~
twomoretime
>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.

~~~
scarface74
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.

~~~
twomoretime
>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.

~~~
scarface74
_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?

~~~
twomoretime
>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?

We're talking about a pandemic where some degree of homeschooling has become
mandatory. I'm just pointing out that the difficulty is minimal when it's a
question of educating your kids. Our specializations are irrelevant.

The rest, which is a different subject, just boils down to our difference
preferences - I prefer to spend my spare time practicing practical skills and
I think society would be far better off if other people did too. Even fixing
cars gives your mind a technical workout that translates to other domains.

~~~
scarface74
_Even fixing cars gives your mind a technical workout that translates to other
domains._

Or I could spend the time improving in the technical domain directly by
bringing my laptop to the service department instead of fixing a car where
they have people who can do it faster with better equipment and somehow hope
that it will make me a better developer, team lead, overpriced consultant or
whatever rabbit I’m chasing at the time.

I’m sure the farmer would also look in disdain because you don’t grow your own
food and instead go the grocery store.

------
sigstoat
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.

------
heyflyguy
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".

------
ben_jones
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?

~~~
Consultant32452
Wait until their house is worth less than the debt. Hide their assets, bail on
the house, declare bankruptcy.

~~~
caymanjim
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.

~~~
Consultant32452
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.

~~~
jacurtis
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.

~~~
rhexs
Does the bank not come after individuals years later for owed debt via
lawsuit? If not, walking away seems like a good idea.

~~~
sagarm
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-recourse-and-
nonrecourse-loans)

------
toast0
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.

------
bdavis__
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..)

~~~
SpicyLemonZest
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.

~~~
jklein11
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%?

------
skybrian
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.

------
fortran77
This makes perfect sense. Why let people get deeper in debt and risk their
houses?

~~~
formercoder
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.

~~~
ratsmack
>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?

~~~
jklein11
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.

------
aazaa
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...](https://www.chase.com/content/chase-ux/en/personal/home-
equity/update)

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](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.

------
bananaquant
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.

~~~
loeg
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.

~~~
imtringued
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.

~~~
loeg
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.

