In another sign that lending standards are tightening fast, starting today E*TRADE Financial Corporation (ETFC) no longer offers home equity lines of credit (HELOC) at rates below Prime regardless of a borrower’s credit rating or equity in the home. This comes just a few days after some less liquid, investment grade mortgage related securities were repriced downward, hurting some safe bond funds.
Previously, somebody with top tier credit and equity in their home could borrow from E*Trade at the Prime rate minus 0.25% and get an additional 0.25% off for automatic payment from certain types of E*Trade accounts.
The Prime rate – currently 8.25% - is what banks charge their most creditworthy customers. It is also the base rate used to set that vast majority of consumer borrowing – everything from car loans to credit cards.
Somewhere in the fog of the real estate bubble lenders decided a first time home buyer less than 10% down and a middling credit score who was buying a house or condo that had doubled in price in less than five years qualifies as their most creditworthy customers.
You can only imagine what the less creditworthy customers look like. Maybe that is why it was recently noted that about one in four subprime mortgages of Countrywide Financial (CFC) were now delinquent.
Cheap and easy credit was a major factor behind post-tech-crash-and-recession economic and stock market strength. The fast money game was already in the ninth inning after the Fed raised short term rates from their ludicrously low levels (a move that leads to Prime rate increases). Lenders (and mortgage backed securities buying investors), realizing home lending may not be as safe as originally modeled (looking at past performance of course), won’t be playing much longer.
At some point there could be some contrarian opportunities to buy mortgage related companies and debt as the pendulum swings the other way and prime mortgage debt with good home equity coverage can yield an investor 8% or more, but we’re there yet.
At least the lines at Home Depot (HD) will get shorter.
In another sign that lending standards are tightening fast, starting today E*TRADE Financial Corporation (ETFC) no longer offers home equity lines of credit (HELOC) at rates below Prime regardless of a borrower’s credit rating or equity in the home. This comes just a few days after some less liquid, investment grade mortgage related securities were repriced downward, hurting some safe bond funds.
Previously, somebody with top tier credit and equity in their home could borrow from E*Trade at the Prime rate minus 0.25% and get an additional 0.25% off for automatic payment from certain types of E*Trade accounts.
The Prime rate – currently 8.25% - is what banks charge their most creditworthy customers. It is also the base rate used to set that vast majority of consumer borrowing – everything from car loans to credit cards.
Somewhere in the fog of the real estate bubble lenders decided a first time home buyer less than 10% down and a middling credit score who was buying a house or condo that had doubled in price in less than five years qualifies as their most creditworthy customers.
You can only imagine what the less creditworthy customers look like. Maybe that is why it was recently noted that about one in four subprime mortgages of Countrywide Financial (CFC) were now delinquent.
Cheap and easy credit was a major factor behind post-tech-crash-and-recession economic and stock market strength. The fast money game was already in the ninth inning after the Fed raised short term rates from their ludicrously low levels (a move that leads to Prime rate increases). Lenders (and mortgage backed securities buying investors), realizing home lending may not be as safe as originally modeled (looking at past performance of course), won’t be playing much longer.
At some point there could be some contrarian opportunities to buy mortgage related companies and debt as the pendulum swings the other way and prime mortgage debt with good home equity coverage can yield an investor 8% or more, but we’re there yet.
At least the lines at Home Depot (HD) will get shorter.