I should know

Banks Using Leverage to Force Home Equity Repayments

This is just another example of “you’re damned if you do and you’re damned of you don’t”. The mortgage lending institutions are being chastised and demonized because they expanded their guidelines and approved borrowers for mortgages that would “normally” not be approved for a mortgage. Now the lenders are being demonized for more prudent underwriting and guidelines for borrowers who are refinancing their first mortgage with another lender and are asking that the current lender who is in second place to stay in second place without reviewing the current circumstances. Let’s say the second mortgage holder originally granted a $70,000 HELOC on a property appraised for $300,000 that had a first mortgage of $200,000. The first mortgage exposure is less than 67% of the appraised value and the second is 23%; a combined LTV of 90%, marginally risky for the HELOC lender, very little risk for the first mortgage lender. Now let’s say that the property owner wants to refinance the first mortgage and have the second subordinated. The home’s current market value is down a little, about 5% or $285,000. The first mortgage holder’s exposure is the first 70% of the value (very little risk) and the second mortgage holder’s exposure is the next 25% of the value; a combined LTV of almost 95%. Now you’re in to high risk territory. IF the house goes in to foreclosure and is sold after foreclosure expenses at 85% (more likely 65% to 75%) the first mortgage holder gets paid in-full and the second mortgage holder gets back about $32,000, about 46% what is due. Who’s carrying the risk? It sure isn’t the lender in first position; it sure is lender number two who gleefully subordinated the HELOC. Another bad decision for the mean old mortgage lender who won’t lend money to every “Tom, Dick, and Harry”. Frankly, I’m glad lenders are tightening credit and approval guidelines and standards. If YOU were the lender in second position holding the vast majority of the exposure and risk, what would you be doing?