Home Equity Credit Update 2007: Both Sides of Declining Home Equity Loan Applications

Dhanisa Mashilfa

Will the home equity lending market see a decline in 2nd mortgage origination for 2007? According to affiliates of Home Equity Wire the industry believe the recent decline of home equity loan applications is more of a credit issue than consumer demand result. John Allen, a spokesman for Smart Home Equity commented, “The banks recently tightened their guidelines for second mortgages in the sub-prime market.” Allen continued, “We have noticed that application volumes have increased. But just as the lending approvals have decreased, so to have the lending turn-down notifications for applicants because their credit scores mainly in the sub-prime sector.

In a recent survey by Home Equity Wire second mortgage originators surveyed in 2006 are expected to produce nearly $375 billion in home equity loans in 2007, which would be a 15% decline from the approximately $439.6 billion in seconds they originated in 2006. Home Equity Wire has previously noted a decline in second mortgage volume throughout 2006 following a robust increase in volume for the first half of the year, with flat 2nd quarter 2006 results. Yet they reported a decline in third quarter of 2006 and fourth quarter 2006 data from the prior year’s periods.

Many mortgage lenders originators have tightened their lending guidelines significantly for both closed-end equity loans and revolving home equity lines of credit. As the lenders attempt to reduce non-performing loans by increase the minimum credit score requirements for 2nd mortgages. Unfortunately this eliminates many potential borrowers who are seeking a home equity loan to consolidate their debts and save money. Ken Carter, executive vice president of National City Home Equity, does not necessarily believe the home equity market is declining. “The market continues to be alive and well. This past year has been an interesting year for the mortgage industry and the MBA continues to talk about normalization,” he said.

National City does consider that this could have an impact on the second mortgage market. “A lot of borrowers are taking out closed-end seconds that don’t require mortgage insurance, so I don’t know if a change in this is going to make an impact,” said Mr. Bailey. “Borrowers can build equity much faster with a home equity loan than they would with mortgage insurance. PMI being tax deductible
has some benefits, but monthly payments are less with 80-20 piggy-back than with PMI. Additionally, the tax-deductible only goes up to household incomes of $110,000 or less. It’s more beneficial for our customers to do piggyback than PMI. We see this as having minimal impact on our mortgage business,” said Mr. Carter.

2007 will be an interesting year that could help insiders get closer to offering more accurate forecasts for home sale recovery. Who knows…? This could be the year that the interest rates for home equity loans spur home construction and help continue to our economy’s steady growth.

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