Magazine article American Banker

Feeling Better Now about High-LTV Loans? Don't, These Experts Say

Magazine article American Banker

Feeling Better Now about High-LTV Loans? Don't, These Experts Say

Article excerpt

A survey released by the Consumer Bankers Association in June painted a sanguine picture of home equity lenders routinely making high-LTV loans-to borrowers who are older, richer, and more creditworthy than before.

The implication was that a growing phenomenon, Americans cashing in the equity in their homes to pay off credit cards and buy cars and vacations, presented few risks for lenders or consumers.

But other observers looking at the same data see a darker picture-of an accident waiting to happen, particularly when the economy sours.

"At some point there will be a hangover" from these second mortgages, said analyst Jonathan Gray of Sanford Bernstein & Co.

"The pumping of large volumes of debt into the consumer sector secured by residences reduces the consumer sector's equity in the housing stock," Mr. Gray said, and makes homeowners more likely to walk away from loans if they are under financial stress.

Indeed, all creditors could be adversely affected, as households have less of an equity cushion to fall back on, said Mark Zandi, chief economist at Regional Financial Associates, West Chester, Pa.

"Households can't turn to their homes in times of trouble-in times of medical problems or unemployment," Mr. Zandi said.

But if priced properly, home equity loans are good business, Mr. Gray added.

Two thirds of the 40 lenders surveyed by the CBA offered home equity loans that, when added to the first mortgage, left homeowners with no equity in their homes.

Six percent of lenders offered loans up to and even exceeding 125% of the home value.

It's this fast-growing trend of loans that exceed the home value that most worries Christine O. Clifford, vice president of David Olson Research, a Columbia, Md., firm that studies the home equity market. "I'm continually surprised by how aggressive lenders are in their underwriting. …

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