Home Equity Credit Update 2007: Both sides of the declining home equity loan applications

Will the Home Equity Market See a Decline in Second Mortgage Origination in 2007? According to Home Equity Wire affiliates, the industry believes the recent drop in home equity loan applications is more of a credit issue than a result of consumer demand. John Allen, a spokesman for Smart Home Equity, commented, “Banks have recently tightened their policies on second mortgages in the subprime market.” Allen continues: “We have noticed that the volume of applications has increased. But just as loan approvals have declined, so too have loan denial notifications for applicants since their credit ratings are mostly subprime.

In a recent Home Equity Wire survey polled by Home Equity Wire, second mortgage originators surveyed in 2006 are expected to produce nearly $375 billion in home equity loans in 2007, down 15% from approximately 439.6 billion dollars in seconds they awarded in 2006. Home Equity Wire previously noted a decline in second mortgage volume throughout 2006 after volumes rose sharply in the first half of the year, with flat results in the second quarter of 2006. Nevertheless, they reported a decline in the third quarter 2006 data and the fourth quarter of 2006 compared to prior year periods.

Many mortgage lenders have significantly tightened their lending standards for both closed equity loans and revolving home equity lines of credit. As lenders seek to reduce non-performing loans by raising minimum credit standards for second mortgages. Unfortunately, this shuts out many potential borrowers looking for a home equity loan to consolidate their debt and save money. National City Home Equity executive vice president Ken Carter doesn’t necessarily think the home equity market is in decline. “The market continues to be alive and well. The past year has been an interesting year for the mortgage industry and the MBA continues to speak of normalization,” he said.

National City believes this could impact the secondary mortgage market. “Many borrowers are taking out second closed loans that don’t require mortgage insurance, so I don’t know if a change will have an impact in that regard,” Mr. Bailey said. “Borrowers can build equity much faster with a home equity loan than with mortgage insurance. PMI is tax deductible

has some advantages, but monthly payments are 80-20 piggyback less than PMI. Additionally, the tax deduction only applies to household incomes of $110,000 or less. Piggyback is more beneficial to our customers than PMI. We expect this to have minimal impact on our mortgage business,” said Mr. Carter.

2007 will be an interesting year that could help insiders offer more accurate forecasts for the home sales recovery. Who knows…? This could be the year when home equity interest rates boost housing construction and help our economy continue to grow steadily.