This is just a theory and I am not making any portfolio decisions based on this, well not now anyway.
The thing about an inverted curve is, as you read everywhere, it indicates a slowdown, or worse, is coming. The fundamental behind that is that lending money is not profitable when the curve is upside down. This inability to access capital is what contributes significantly to the slowdown.
Enter the HELOC, home equity line of credit. This obviously is a part of the home as ATM issue that, rightly, concerns many people. The growth in HELOCs has been huge and the yield curve for these adjustable loans is still very positive. Passbook, money markets and CD rates are in the fours and fives while rates charged for HELOCs are in the eights for people with good credit.
The chart is not so great nor is it very timely (if anyone has a better one please leave the link) but it shows almost a tripling in HELOCs.The theory would be that now that HELOCs are more popular and presumably more available they do provide access to capital to the retail banking client that any slowdown could be muted or even negated by a favorable lending environment for HELOCS.
There are of course several flaws here. Many believe that the quality of these loans is poor, that consumers are already over-leveraged and more consumer debt would be a negative, this is not a product used by companies (perhaps the yield curve for the types of short term credit facilities used by businesses is also positive) and it would not take too long to come up with a couple of others.
As I said I am not making portfolio changes around this.
The idea with this is to seek out a more plausible explanation than some of what we may be hearing if this time turns out to be different.
As a side note, there were a lot of interesting comments left over night. I will respond later but Muckdog's comment about the Red Sox needing some of the little leaugers would really tick me off if wasn't so close to right, doh!
3 comments:
Market is telling you a recession is coming. But by the time it hits, the market will be going up in anticipation of the recovery.
Old news.
I'd suggest looking at the HELOC market from the other side...it's one of the most "profitable" products banks are currently offering (at least from an implied return perspective).
Given the product is so seemingly profitable to banks, wouldn't it stand to reason that spreads are probably tighter than they would be in an environment where long-term treasuries were more competitive?
So what does this tell me? Bank profits will probably be eroding on two fronts. First, with a slowdown, credit issues will probably start to impact the "profitability" of this product. Second, banks will be issuing less, not more, HELOCs due to re-thinking the risk models used to approve borrowers.
It's funny, we work around a few mortgage lenders and over the past few months, their business has picked up dramatically. Not traditional "sales", but as you've probably guessed, everyone wants another crack at what they consider easy money extraction from their homes. Approval rates though are standing at about 1 in 3.
We have had a HELOC for years, use it ONLY for major items, cars and boats mostly. We pay it off just like it was regular financing. We have a winter home (snowbirds) and recently received an offer for taking out a HELOC. My husband checked it out and the rate was much lower (over a point less) than our current one. So we are going to switch. Duh. I was amazed and can't figure out why the difference.
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