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.