Some second mortgages may be joining the condemned ranks of subprime and nontraditional first mortgages in the pool of dead loans walking.
As if there wasn't enough horror in the mortgage sector of the housing market, the rate of delinquencies on home equity loans rose about 7 percent in the fourth quarter, compared the third quarter last year according to the American Bankers Association.
The percentage of home equity loans that faced delinquencies rose from 1.79 percent during the third quarter in 2006 to 1.92 percent during the last quarter.
Home equity loans' delinquency rate remains lower than it was this time last year, however, at that time, the delinquency rate was falling -- from 2.33 percent in the third quarter 2005 to 2.07 percent during the last quarter, according to the bankers association.
Meanwhile, home equity lines of credit (HELOC) held at 0.57 percent in the lowest delinquency rate category, the association reported. Last year at this time, home equity loans' delinquency rates were about the same, 0.51 percent in the fourth quarter 2005, up from 0.46 percent, during the third quarter.
What's the difference?
The difference may account for the year-end delinquency trend.
A home equity loan is a second mortgage that locks in the amount borrowed, the interest rate and the term, much like a conventional, conforming first mortgage, but at a greater cost. Bankrate said the rate for a $50,000 home equity loan for someone with a 700 to 719 credit score, averaged 7.36 percent nationwide on April 2. The average for first mortgages was more than a full percentage point less.
A HELOC is also a second mortgage, but it works more like a credit card. Home owners get a revolving line of credit with a credit limit for a given time period. During the term, home owners can withdraw money as needed, or not. They can also pay down or pay off the balance and continue to use the credit during the term, like a credit card. The average rate for the same $50,000 loan averaged 7.25 percent on April 2, according to Bankrate.
However, HELOCs' rate is variable, like an adjustable rate mortgage (ARM). The rate fluctuates and payments vary depending upon the rate. Home owners can choose to only pay the interest for a time or for the full term, typically five to 10 years. At the end of the term, home owners have options to pay it off, roll it over, or refinance it with the first mortgage, among other options.
Many home owners use HELOC's to tap equity for home improvements, and that sector of seconds also isn't suffering rising delinquency rates. During the last two quarters of 2006 property improvement loan delinquencies decreased from 1.68 percent to 1.29 percent, according to the bankers association.
Typically, using a HELOC until the job is done, home owners have the option of withdrawing cash only when and if it is needed. Home improvement or not the flexibility makes for more manageable payments and better budget watching.
While variable rates have risen on older HELOC's in recent years, home owners apparently have managed to keep current in that sector, more so than any other, according to the association.
Among those suffering second loan risk could be home buyers who were trying to cope with fast rising home prices during boom times and needed a set-amount of extra cash to pad their down payment and avoid mortgage insurance -- before it was tax deductible.
They frequently went with the fixed rate, fixed term second or equity mortgage in the form of a so-called piggy-back loan to come up with a larger down payment, which indicated they were already strapped for cash.
While the second may have been fixed, some likely chose to ease their financial burden with an ARM first and are beginning to really feel financially strapped. Perhaps just the burden of two fixed-rate mortgages with no flexibility weighs too much.
As long ago as the summer of 2005, "The Hidden Risks Of Piggyback Lending" by the PMI Mortgage Insurance Co. said 42 percent of home purchase dollars involved piggyback loans during the first half of 2004, more than double the level in 2001.
Certainly, the piggy-backs were squeezing the mortgage insurance business, but PMI wasn't the only critic of the loans.
Piggy-back seconds were also considered risky business along with other so-called nontraditional loans recently hit with stiffer federal guidelines in "Interagency Guidance on Nontraditional Mortgage Products" and "Credit Risk Management Guidance For Home Equity Lending".
Early this year, states, in lock step, began cracking down on the same group of loans written by lenders not federally regulated.
In any event, the tick up in home equity loan delinquencies is another ominous reminder for consumers who don't know what they are signing when they buy a home.
"It's not a surprise to see some increase in home equity loan delinquencies, given the weaknesses in the housing market," said James Chessen, ABA's chief economist.
The quarterly survey of more than 300 banks nationwide, reporting the percentage of consumer loans that are 30 days or more past due also comes with some advice.
The association suggests home owners review their finances every year and watch for the warning signs of overextended credit:
- Paying only the minimum payment month after month.
- Being constantly broke.
- Being late on important payments, such as rent or mortgage.
- Taking ever longer to pay off balances.
- Borrowing from one lender to pay another.
Home owners who do find themselves in trouble, should, at the first sign of trouble, before they become delinquent:
- Call the lender and stay in touch until the crisis has passed. Head-in-sand behavior blurs vision.
- Stop buying stuff. Don't charge more.
- Avoid, foreclosure and bankruptcy and get some financial counseling.
