The Nation's Housing Column: Bank windows open a bit wider
Using your home as an ATM no longer is a financial option, but the tools that allowed owners to pull out massive amounts of money during the boom years - equity credit lines and second mortgages - are making a comeback.
Banking and credit analysts say the dollar volumes of new originations of home equity loans are rising again - significantly so in areas of the country that are experiencing post-recession rebounds in property values. These include most of the Atlantic coastal states, the Pacific Northwest, California, Arizona, New Mexico, Texas and parts of the Midwest.
Not only have owners' equity positions grown substantially on a national basis since 2011 - up by an estimated $1.7 trillion during the past 18 months, according to the Federal Reserve - but banks increasingly are willing to allow owners to tap that equity. Unlike during the credit bubble years of 2003-06, however, they aren't permitting owners to go whole hog - mortgaging their homes up to 100 percent of market value with first, second and even third loans or credit lines.
Now major lenders are restricting the combined total of first and second loans against a house to no more than 85 percent of value. For instance, if your house is worth $500,000 and the balance on your first mortgage is $375,000, you'd likely be limited to a second mortgage or credit line of $50,000. Contrast this with 2007, the high-point year of home equity lending, when many lenders offered so called "piggyback" financing packages that allowed 100 percent debt without private mortgage insurance. A buyer of a $500,000 house could get a $400,000 first mortgage and a second loan of $100,000.
That ultimately didn't work well for the banks. During the third quarter of 2012 alone, according to federal estimates, banks wrote off $4.5 billion in defaulted equity loans, often in situations where homeowners found themselves underwater and behind on both first and second loans. In such a situation, second mortgages become essentially worthless to the bank, since in a foreclosure the holder of the first mortgage gets paid off first. On underwater foreclosures, the second loan holder is left holding the bag.
Lenders this spring are also much pickier on credit quality than they were as little as six years ago. If you've got a delinquency-pocked credit history, and you want to pull out a substantial amount of equity using a credit line, don't count on getting anywhere near the best rate quotes or terms available.
To illustrate, say you own a house worth $600,000 in Los Angeles with a $400,000 first mortgage balance, and you want a $100,000 equity credit line. Wells Fargo's online equity loan calculator quoted a floating-rate "home equity account" for 10 years at 4.75 percent in mid-April for borrowers with "excellent" credit. The site defines excellent as meaning no missed payments and no delinquencies on your credit report. For a borrower with "average" credit seeking the same $100,000 credit line, by contrast, the rate jumps to 7.5 percent. The term "average" means you've got a credit history with delinquencies and perhaps other problems.
Matt Potere, Bank of America's home equity product executive, said in an interview that his institution has no specific cutoffs for FICO credit scores, preferring instead to look at multiple factors simultaneously - combined loan to value (CLTV), full credit history of the applicant and the location of the property. Location factors into pricing, Potere said, because some markets have historical patterns of high volatility - prices spiral upwards for a while, then plummet. This raises the potential costs to the bank if a borrower goes delinquent during a period when values are in decline. Some jurisdictions also factor special add-on costs into quotes, such as mortgage taxes, and these can raise pricing quotes slightly.
Despite the multibillion-dollar losses that Bank of America and other large lenders have racked up on their equity loan portfolios from the bust and recession period, executives such as Potere are convinced that this time around, things will be different thanks to smarter underwriting.
Bottom line: If you have equity in your house, a need for cash in a lump sum or credit line and can get through the underwriting hoops and snares set by loss-leery lenders, go for it. Rates are low and the bank windows are opening again.
Just not as wide as they once did.
Ken Harney's email address is email@example.com.
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