“Home equity loan origination dropped more dramatically, falling 77% on a year-to-year basis. “Declines reflect tighter underwriting standards and the overall reduction in liquidity in the financial markets,” the bank said.”

We known that taking out a home equity line has become more difficult due to recent economic turmoil, but that’s still a pretty shocking number.

I recently spoke with a few mortgage brokers in California – They say times are are so tough entire offices are empty, many support services (such as couriers) have gone bankrupt, and their peers are looking for hourly wage jobs doing just about anything.

See Also:

65% Find it Harder to Take out a Home Equity Line

HELOC Loan-to-Value Requirements Get Tough

Review Companies Cancel HELOC Foreclosures in California

“BasePoint Analytics(TM), a leading provider of scientific fraud and risk analytic scoring solutions, today announced the availability of FraudMark(R) for Home Equity, the industry’s only fraud detection solution designed to address the home equity market, enabling lenders to fund loans with confidence…

The FraudMark for Home Equity solution applies BasePoint’s proven pattern recognition analytics to new loan applications, enabling lenders to focus investigation on the most risky applications before spending resources for underwriting and external verifications.”

This program may help lenders avoid awarding bad home equity lines in the future. However, it seems that the current problem of poor performing home equity portfolios has more to do with lax lending standards and dishonest brokers rather than borrowers trying to trick the system.

See Also:

Is a HELOC Right for You?

How to Qualify for a HELOC

HELOC Loan-to-Value Ratio Requirements Get Tough

“According to those who have attempted to secure several types of credit and mortgage products over the past year, a majority found it to be more difficult. Deloitte’s survey revealed:

• Of those who applied for a home mortgage, 67 percent found it more difficult; for a home equity line of credit (HELOC), that number was 65 percent.
• Personal loan applicants weren’t much better off, with 62 percent finding it harder to get credit.
• More than three-quarters (76 percent) of those who applied for small business financing found it more difficult, compared with one year ago.”

With all focus on home equity line freezes in the news, most prospective borrowers already know that HELOCs are more difficult to secure. But, this survey helps solidify the fact.

See Also:

How to Qualify for a HELOC

How to Get the Best HELOC Rates and Terms

As home values declined, these loans became increasingly risky for banks. If a borrower has a 95% loan-to-value HELOC and his home declines 6%, the borrower is unable to pay back the loan simply from selling the property.

To combat this problem, most lenders have instituted tougher loan-to-value requirements for new HELOCs. Money 911 reports:

“Before you borrow, you need to be sure that your home still has the equity that you think it has and that a lender is willing to let you take out a HELOC — a home equity line of credit — which is a better option than a home equity loan. Many lenders won’t let you go past 85 percent LTV with a HELOC. Some are as low as 60 percent LTV. It’s harder to borrow against your home today than it was two years ago.”

If you’re planning on taking out a HELOC, make sure you have substantial equity in your home. Gone are the days when borrowers could take out a home equity loan right after their purchase loan left the closing table.

See Also:

OCC Chief Urges Stricter HELOC Underwriting

How to Qualify for a HELOC 

Here are a few HELOC deals out there right now, as discovered by TheStreet.com:

• In Abilene, Texas, Bank of America is offering a rate of 4.99% on lines of credit between $100,000 and $300,000 (up to 80% LTV) with no annual fee.

• In Bradenton, Fla., GTE Federal Credit Union is offering a rate of 4.00% on lines of credit between $5,000 and $250,000 (up to 80% LTV) with no annual fee.

• In Garfield Heights, Ohio, Ohio Catholic Federal Credit Union is offering a rate of 3.74% on lines of credit between $5,000 and $50,000 (up to 80% LTV) with no annual fee.

Check with your local lenders – you may be surprised at what you can find.

See Also:

How Federal Rate Cuts Affect Your APR

How to Qualify for a HELOC 

“Home equity loans and lines of credit grew dramatically in recent years, more than doubling, to $1.1 trillion, since 2002. In part, that’s because of the rapid appreciation in house prices, the tax deductibility feature of home equity loans, and low interest rates.

“But another contributing factor was perhaps not so obvious: liberalized underwriting standards,” Mr. Dugan said, in a speech to the Financial Services Roundtable’s Housing Policy Council. “These relaxed standards helped more people to qualify for loans, and more people to qualify for significantly larger loans.”

These relaxed standards included limited verification of a borrower’s assets, employment, or income; higher debt to equity ratios; and the use of home equity loans as “piggyback” loans that helped borrowers qualify for first mortgages with low down payments and without mortgage insurance, resulting in ever-higher cumulative loan-to-value ratios.”

If banks heed Dugan’s counsel, borrowers may have an even more difficult time taking out HELOCs than they already do in this post-boom market. Here are a few of the common HELOC practices he criticized:

• The use of home equity lines to finance down payments.
• The appropriate use of collateral valuation tools, such as asset valuation models, which the Comptroller said must be closely managed, periodically validated, and supported with sound business rules.
• Income documentation. Although the overt use of stated income has been largely abandoned, some lenders now ask for income information and authorization to verify it, but do not follow through. “This practice is only marginally better than expressly relying on stated income, since it is questionable whether the borrower’s belief that income will actually be verified will really induce a higher level of honesty in providing information,” Mr. Dugan said. “We need to think carefully about whether anything short of actual verification of income is acceptable from a safety and soundness perspective for most borrowers.”
• The extended interest-only structure that home equity credit lines have in the early years of the loan term. Payment patterns can only be a proxy for a borrower’s capacity to handle a given debt level if he or she is asked to make payments that are meaningful. “Interest-only payments reflect a borrower’s capacity to pay interest on a debt, but not the debt itself,” Mr. Dugan said. “Further, this lack of structured payment discipline encourages borrowers to assume greater levels of debt, often to the limit of their ability to make minimum monthly payments. In contrast, higher payments that reduce principal address both these concerns.”

It’s tough to take out a HELOC in today’s market, but it may become even more of a challenge in the next six months.

See Also:

Tighter Lending Standards for HELOCs 

How to Negotiate the Best HELOC Rates and Terms 

The Problems of Working Directly with a Lender

When you go to directly to a lender, such as Countrywide, you are probably going to work with an unlicensed employee who doesn’t neccissarily know much about loans. Representatives for lenders don’t have to undergo the same kind of training and testing that is required for mortgage brokers. The employee that helps you only has access to the loans provided by his employer. Due to inexperience, he may not be able to manage problems when the arise. (I’m not saying all of these representatives are unskilled. But, in my experience, many really don’t know much about the mortgage business. When I bought my first home, I asked my Countrywide representative what “APR” meant. “Um, I don’t know,” he said. “I don’t think that’s important…”)

How a Mortgage Broker Can Help

When you meet with a mortgage broker, you know that he’s met some minimal licensing requirements. A capable mortgage broker will know the ins and outs of the system and be able to find the best HELOC possible. If one lender won’t work for your situation, he can look for another. Experienced mortgage brokers should also be able to mitigate problems with the underwriter. If your HELOC loan application doesn’t pass the automated desktop underwriting system, your broker may be able to convince the underwriter to review the material and do the underwriting manually. This is assuming, of course, that your application should be able to pass due to a special circumstance. If you come nowhere close to meeting the guidelines, your chances are slim to none.

Choosing a HELOC Mortgage Broker

When choosing a mortgage broker, ask for recommendations from people you trust. Find someone who has a lot of experience working with HELOC clients. Remember: not all mortgage brokers are trustworthy or are skilled with helping home equity customers. Do not pay your mortgage broker anything upfront. When the broker is paid at the closing of the loan, he has a greater incentive to make your HELOC go through.

See Also:

How to Negotiate the Best HELOC Rates and Terms

Lender Obligations Under the Truth in Lending Act

A vast majority of lenders have made it more difficult for borrowers to qualify for HELOCs during the past three months:

“About 70 percent of domestic respondents—a somewhat higher fraction than in the January survey—indicated that they had tightened their lending standards for approving applications for home equity lines of credit (HELOCs) over the past three months. Regarding demand for these lines, about 20 percent of domestic banks, on net, reported weaker demand over the past three months.”

Many have also changed their terms for existing HELOC customers during the past six months:

“About 50 percent of domestic respondents reported having tightened terms on existing HELOCs over the past six months. Nearly all respondents pointed to declines in the value of the collateral significantly below the appraised value for the purposes of the HELOCs as reasons for tightening terms on these lines. Large majorities of respondents also cited increased defaults of material obligations under loan agreements, as well as significant changes in borrowers’ financial circumstances, as additional reasons for tightening terms on the existing HELOCs.”

For anyone following the mortgage crisis, none of this comes as a surprise. Fewer people are applying for HELOCs and fewer loans are being granted. However, HELOC lenders are continuing to advertise and credit-worthy customers have reported success in securing lines (now with lower interest rates, thanks to recent federal cuts).

See Also:

Which Lenders Are Freezing HELOC Lines?

Is the HELOC in Decline?

“Fannie Mae will no longer allow homeowners to refinance loans it either owns or has packaged into bonds at typical loan-to-value ratios in areas with falling home prices if they’re going to use proceeds to pay off a second mortgage, according to a memo to lenders dated Monday and posted on its website.

The government-chartered company, which owns or guarantees almost $3 trillion of US mortgages, four months ago reinstated a policy that requires lenders to boost by 5 percentage points the required size of down payments or borrower equity on new lending before Fannie Mae will accept the debt, part of a series of changes to standards at the company and rival Freddie Mac amid the largest drop in US home prices on record.”

In short: If you live in an area with falling home prices, you may not be able to refinance your first mortgage in order to pay off your HELOC. Additionally, new HELOC customers will need to have more equity in their homes before taking out a home equity line of credit.

These new rules apply to borrowers with mortgages using Fannie Mae funds.  (Note that Fannie Mae is not a  lender; but many lenders such as Wells Fargo and Countrywide use Fannie Mae funds to create loans.)

“Lenders periodically conduct “portfolio reviews” to examine whether the assets (in this case homes) against which they have extended credit have held their value, says Richard Hagar, an appraiser at American Home Appraisals in Mercer Island, Wash., who teaches courses on mortgage fraud.

In recent years, Hagar says lenders would loan up to 120 percent of a home’s value (up to 100 percent for a primary mortgage plus 20 percent for a home equity line). But now lenders have returned to their prior conservative metrics. This means they’ve capped lending for 90 percent of the home’s value, including the primary mortgage and home equity line. And they’re doing it at a time when many markets’ home values are declining.”

Some HELOC borrowers have been told they can only take out up to 60% of their home’s equity. Of course, these numbers are based on many variables including the borrower’s credit worthiness and the location of the property.

See Also:

HELOC Lenders Reporting Losses

How to Qualify for a HELOC