Nationally, the total of second mortgages authorized climbed to an estimated $60 billion last year from a low of $49 billion in 2010, according to the trade publication National Mortgage News. That’s still way down from a record of $430 billion in 2006, but experts predict another surge in home equity lending this year.
For lenders, the credit lines are riskier than first mortgages, which would be paid off first in case of a foreclosure. Still, these are no longer the easy-money loans of the housing boom, bank officials assure. Applicants who get approved today have high credit scores, along with ample savings and equity in their homes.
During last decade’s housing boom, the standards were quite different — sometimes nonexistent. Banks have lost billions on loan defaults from that era.
The losses aren’t over. The way the credit lines are structured has created a new problem — payment shock on credit lines issued during the bubble. That’s because the credit eventually runs out. At that point, often 10 or 15 years later, borrowers must pay back the entire amount or make set payments on the debt monthly, as with a traditional loan.
That can cost borrowers hundreds of dollars a month extra—payment shocks that will reverberate as the credit lines come due. National bank regulators have calculated that the draw periods will end for $29 billion in home equity credit lines this year at the nine largest U.S. banks. Those numbers rise to $52 billion next year, $62 billion in 2016 and $68 billion in 2017.
Officials at Bank of America and Wells Fargo & Co. says they have begun reaching out to borrowers well in advance of the date their credit lines mature, making sure that they are prepared for higher payments and, if necessary, talking about modifying the terms of the credit lines.
Meanwhile, lenders are wading back into the business of issuing new home equity credit. In high-end markets, which recovered first, some borrowers are using home equity credit lines of $100,000 to $250,000 “as a financial tool” to buy more real estate, says mortgage broker Richard T. Cirelli in Laguna Beach, Calif.
Klasen, the homeowner approved for a credit line last month, has more modest ambitions. He and his wife, Wana, bought a new washer and dryer in addition to the painting and roofing work.
“We’re putting the money back into the house,” he says.
©2014 Los Angeles Times
Distributed by MCT Information Services
