Dangerous Minefields

Keep in mind that the outstanding amount in HELOCs is much larger than that of HEILs. As of July 2014, roughly $480 billion of HELOCs is still on the books of lenders. That is a truly sobering thought.

My Advice to You
I seriously doubt that the servicers can come up with a HELOC modification program that meets the requirements of the regulators’ guidelines. Perhaps servicers could prevent “unnecessary defaults” if they decided to continue interest-only payments indefinitely. However, the guidelines explicitly rule that out.

There are still roughly 10.2 million HELOCs outstanding, according to Equifax. You must keep in mind that the vast majority were originated during the bubble years. When none of the regulatory agencies anticipated the bubble’s collapse, why should we expect them to find a way out of this mess? I don’t.
How does this affect your clients? First, many probably own an expensive home and one or more investment properties. I gave a presentation three years ago after which an attendee came up to me and asked what she should do about her five underwater investment properties. You will probably have many of your clients ask similar questions over the next year.

You probably also have clients who own shares in mortgage REITs or hedge funds heavily invested in mortgage-backed securities. They are betting on a continued recovery in housing markets. It is a much bigger gamble than they realize. I have written extensively about the total collapse in mortgage REIT share prices in 2008 and 2009, and if you are advising your clients to assume that this will not happen again, it may not be prudent advice.

In January, I gave the closing presentation at Institutional Investor’s Risk & Liquidity forum in Manhattan. My topic was “The Wisdom of Knowing When to Sell.” Wall Street does not teach that to investors. Yet it is indispensable for every investor, regardless of the assets in their portfolio.

You will probably agree with me that the old buy-and-hold strategy of years past is very dangerous in this QE world. What should prudent investment advisors recommend that their clients do? Didn’t prudence require them to advise selling real estate-related assets in 2005 and 2006 before the collapse began? I suspect that relatively few gave such wise advice.

As I see it, we are again at the precipice looking over a cliff. If you think I am exaggerating, go to my article archives at Realclearmarkets.com or at dshort.com and read several of them. Can you or your clients afford to disregard the warnings?

Having followed real estate markets closely for many years, I was astounded at how long real estate prices were able to rise before the collapse finally began in late 2006. I have also been amazed at how the “kick-the-can-down-the-road” strategy has lulled us into a dangerous complacency and a belief that the coast is clear.

My advice for you and your clients is to assume the worst and plan accordingly. The conventional wisdom now is that going into cash is a loser’s game. May I ask why? Institutional investors would love to have moved heavily into cash before the 2008-2009 crash.

There is a time to buy, a time to hold and a time to sell. My analysis tells me that this is the time to sell real estate assets of all kinds. 

Keith Jurow  is a real estate analyst who has been writing in-depth articles about housing and mortgage markets for more than four years. His new subscription report—Capital Preservation Real Estate Report—launched a little over a year ago.