Get ready. There's more trouble ahead for home buyers, home builders, and especially homeowners who took out home-equity lines of credit before the housing crisis. Those heydays have turned into haymakers.
What's already started to happen might not only knock out the formerly aspiring but now petering-out housing recovery, but also might knock the already weak economy to the ground.
Back in the good old days, when banks and mortgage shops were selling mortgage money and home-equity credit lines like carnival barkers wowing crowds into the big top, millions of homeowners stepped right in.
That circus tent was nothing but a trap, however. And now I'm going to tell you what that trap means for those borrowers... and the rest of the economy...
The "Custom" Mortgage Is About to Come Due
Intoxicated by rising home prices, in the years before 2007 or so, homeowners took out hundreds of billions of dollars in loans against the equity in their homes. What made the deals most enticing were the terms. Most of the so-called HELOCs were 10-year, interest-only loans (that sounds nice ...) that would "convert" into 15-year amortizing mortgages (uh-oh!).
(Remember when we all seemed to be using our homes as ATMs? What were we thinking?)
Well, those trigger dates have been firing indiscriminately, shooting a lot of homeowners where it hurts the most.
According to today's Wall Street Journal, some 817,000 homeowners, with $23 billion in loans, will see their interest-only holiday come to a reality-busting end this year. And this is just the beginning. Over the next three years, an average of $50 billion a year in HELOCs will be converting.
What does that look like to homeowners? The Journal cited two examples. A real borrower had his monthly payments on the $70,000 he borrowed rise from $270 a month to $560 a month. Those payments are "adjustable" and could rise dramatically if interest rates rise.
In an another example from the WSJ, a $100,000 loan with an interest-only payment plan and a 3.5% rate subjects the borrower to current monthly payments of $292. Once converted, the monthly payments will jump to $715 on a 15-year amortizing mortgage note. That would rise further to about $865 if interest rates rise three points.
The consumer credit reporting agency Equifax and the U.S. Office of the Comptroller of the Currency recently reported that delinquencies on HELOCs made during the heydays doubled last year over the previous year.
Homeowners aren't going to be able to refinance those HELOCs if they have less equity in their homes when the loans convert than when the loans were made - which is most of them.
Banks aren't going to be lending generously if and when delinquencies rise. And if home prices stall out here or, heaven forbid, backslide, there's no way there's going to be a flood, or even a trickle, of mortgage money available.
The housing market may be facing another wall. That means home builders may not be putting up as many houses as they had hoped. Because housing makes up about 15% to 20% of GDP, a drop in housing starts puts home sales, construction, remodeling, and all the other businesses and consumption trails associated with housing in the line of fire.
That puts the entire economy in the line of fire. And speaking of fire, the economy's first-quarter growth - make that negative growth of -1% - is a fire.
That's why we're short a bunch of housing-related plays at my Short-Side Fortunes newsletter.
We will be patient - our trades aren't going to pop overnight - but when the roof comes down, our house will be rockin'.
[Editor's Note: The trades Shah's referring to, by the way, are dumbfoundingly simple to place. After making $80 million, in fact, the world's greatest investor said "it's the easiest money I ever made." And all you have to do is be willing to break one simple "rule." Just look at this chart.]