If you have a pressing need to raise some cash, here’s some good news: Rising home values are encouraging lenders to revive a product that imploded during the housing bust years: second mortgages.
Researchers at Equifax, one of the three national credit bureaus, say total outstanding balances of residential second mortgages at banks rose in the latest month for the first time in nearly five years. Though the jump was relatively small — about three-tenths of 1 percent — analysts say any increase in the amount of second mortgages is a bellwether event, indicating that major lenders are showing growing confidence that the real estate market has finally made the turn to recovery. The Federal Reserve recently reported that American homeowners’ equity stakes rose by $406 billion during the second quarter — a 5.9 percent increase from the previous quarter — to
$7.28 trillion, the highest that figure has been since 2008.
Second loans, which include fixed-payment mortgages as well as floating-rate home equity lines of credit, put the bank in second position in the event of a foreclosure. Say you have a house worth $250,000 with a $200,000 first mortgage and a $20,000 second mortgage. The proceeds of any foreclosure would initially be used to pay off the lender in the first position. Any remainder would pay off the holder of the second lien. Because lenders assume a “junior” position when they make a second loan, these mortgages are generally considered to be higher risk and carry higher interest rates and fees than a first.
Second loans can be used for a variety of purposes. Paying for kids’ college tuition, injecting capital into a small business, financing a home improvement and paying off credit-card debts are among the most popular.
Equifax, which receives information from virtually every major bank and mortgage lender, compiles data on a variety of loan products. In its latest National Consumer Credit Trends study, it found that home equity lending appears to be rebounding fastest in New Mexico and California, where outstanding balances jumped by 2.3 percent, along with Nevada (2.1 percent), Colorado (2 percent) and Florida (1.6 percent).
In an interview, Equifax chief economist Amy Crews Cutts said increases in equity lending “are really a healthy sign” for the economy overall because in the years following the housing bust, many banks had little confidence that home prices were stable enough to lend against in second position.
Now when Cutts speaks with bankers, she finds them “pretty willing to do [second] loans when their customers need them — they’re much more open” than they’ve been in years. Though underwriting standards are tougher than they once were, banks are lending again, and they are experiencing smaller losses. In the most recent study, Cutts said, second-mortgage write-off rates fell to just
2.7 percent, the lowest they’ve been since February of 2008.
Matt Potere, home equity executive for Bank of America, called second loans “an important element” in his company’s “customer-relationship strategy” and said that “we expect growth to occur as market conditions continue to improve.” James Chessen, chief economist for the American Bankers Association, agrees that “it’s good news that finally there’s some upward movement” in home equity lending, but he isn’t yet convinced that it’s a long-term trend, in large part because of slow job growth and uncertainty about the economy. Also, notwithstanding Equifax’s finding that write-offs are down, Chessen’s own surveys indicate that delinquencies on home equity loans rose from 4 percent to 4.09 percent in the latest quarter.
Rate quotes and terms on home equity loans appear to reflect some of that uncertainty. A quick look at quotes on Oct. 5 at Bankrate.com showed that depending on the way banks perceive local markets, rates can vary significantly. For example, in suburban Maryland, Bank of America offers a $75,000 second mortgage at 6.34 percent, assuming the borrowers have FICO credit scores in the 700 to 850 range — good to excellent — and a total loan-to-value ratio no higher than 80 percent. In the Los Angeles County city of Hawthorne, by contrast, a loan of the same size with the same criteria comes with a 7.24 percent rate.
So be aware that while lenders are more willing to extend home equity credit, rates can vary — sometimes from as low as the mid-4 percent range to the mid-8s — depending upon the location of the house, loan size and your credit score.