Home
equity lending standards are tightening due to a rash of defaults and the move
by some subprime lenders to file bankruptcy or go out of business. The industry
has taken a hit and less credit will be available for at least six months while
lenders see what the market does.
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| Changes coming for borrowers | |
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These
unexpected jumps in default rates will translate to tougher underwriting standards,
says Katie Porter, associate professor of law at the University of Iowa and a
mortgage bankruptcy researcher. If you're ready to borrow against the equity in
your home, expect to provide more documentation and don't expect to borrow your
home's full market value, says Porter. 1.
Fewer no-doc loans
Borrowers can expect a decline in "no
documentation" loans -- also called no doc, low doc or liars loans. These
loans require no verification of the borrower's income strength. Lending decisions
are based purely on asset value and the lender will foreclose if the borrower
can't pay. The default rate on these loans is much higher. And, because the real
estate market has slowed in many areas, the risk to both the borrower and lender
has increased. Porter allows that this type of loan may still be appropriate in
certain circumstances for consumers with nontraditional income sources, whose
income is hard to prove, but there. 2.
Fewer piggyback loans
The other trend she sees is a cutback on piggyback
loans because of their high default rates. A 2006 Standard & Poor's study
found that piggyback loans are 43 percent more likely to go into default than
stand-alone first mortgages of comparable size. That number rose to 50 percent
for borrowers with FICO credit scores of 660 or less -- a score that still falls
in the "acceptable" range. Instead, Porter predicts a return to private
mortgage insurance and larger down payment requirements. "We'll see piggyback
loans not carrying such a high load of debt-to-equity ratio," she says. 3.
Lenders tightening requirements
Even though many of the loans going
into default were granted based on well-proved credit scores, some types of loans
offered hadn't been around in the past. In addition, lenders had been loaning
on higher percentages than ever before, with some legitimate lenders offering
loans up to 100 percent of home value, and some predatory lenders offering up
to 125 percent. Loans will definitely require more investigation than has been
the case during the past two or three years. 4.
Good news on rates
One bright spot is that interest rates are not
expected to rise dramatically in 2007, based on initial conclusions from Freddie
Mac. Freddie Mac's January 2007 Economic Outlook says inflationary
pressures are expected to remain low due to falling energy prices: "Low inflation
is likely to keep long-term interest rates below 6.5 percent this year and the
yield curve -- i.e., the difference between short and long-term rates -- is likely
to remain inverted throughout the coming year. One-year Treasury ARMS are forecast
to average 5.5 percent each quarter of 2007." Of course this all comes with
the caveat: "Energy price shocks could impact this prediction." Audio
story: What home equity lenders look for  | Has home equity funded your dreams
or turned into a nightmare? . |
-- Posted:
May 21, 2007 |
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