Cover story: Home-equity spigot opens slightly

In 2008 and 2009, many homeowners were shocked when their lenders canceled their home-equity line of credit or reduced the amount of credit available. The combination of plummeting home values and the credit crunch made this particular loan product almost impossible for many borrowers to find.

A recent Bloomberg article reported that economists anticipate a modest rebound in home-equity lending in 2010, with lenders expected to approve about $36 billion in new home-equity loans this year nationwide.

The key elements in obtaining approval for a home-equity loan or home-equity line of credit are the equity in the home and the creditworthiness of the borrower. A home-equity loan is a fixed sum of money taken out all at once, while a home-equity line of credit (HELOC) establishes credit secured by the home that can be accessed gradually and continually during a draw period.

“A HELOC acts as sort of a big credit card secured by your home,” says Steve Krieger, vice president of mortgage collection and equity lending at Navy Federal Credit Union in Vienna, Va. “A home-equity loan is similar to an auto loan which has fixed payments. HELOCs can be used over and over again as the borrowers pay back the money.”

Mr. Krieger says HELOCs typically have an adjustable rate and are considered slightly riskier for the lender than a home-equity loan because the monthly payments will fluctuate along with interest rates.

“The HELOC terms we offer now allow borrowers to draw on the line of credit for 15 years and then pay it back over a five-year period,” Mr. Krieger says. “We are considering extending these terms in the near future. I’ve also seen other HELOCs offered with a 10-year draw and a 10-year payback period.”

Alex Lieb, a loan officer with Access Capital Mortgage, an affiliate of Presidential Bank in Bethesda, Md., says, “In 2008 and 2009, lenders were checking on home values of their home-equity borrowers and began slashing lines of credit down from $100,000 to $50,000 or even $20,000 or less, depending on the equity in the home and the home-value trends in the neighborhood. Now home-equity loans are coming back.”

Mr. Krieger says his company pledged to lend $6 billion nationwide for mortgages and home-equity loans. This year it expects to lend more than that to its members.

“As home values begin to rise and unemployment eases, we believe we will be able to approve more home-equity loans to applicants,” Mr. Krieger says. “It really comes down to the equity issue. We want to make every loan we can, as long as we know the members can repay the loan.”

Mortgage broker Brian Martucci, who works in the District with GetLoans.com, says consumers will have the greatest chance of qualifying for a home-equity loan if they go directly to a community bank or a credit union rather than to a mortgage broker or large national bank.

“Mortgage brokers have few sources for home-equity loans, and the big banks are not offering very good pricing for home-equity loans right now,” Mr. Martucci says.

Earlier in the decade, some lenders were approving home-equity loans for as much as 95 percent combined loan-to-value (CLTV), meaning the homeowners had both a first mortgage and a home-equity loan equal to 95 percent of the property value. Today, most lenders will lend a maximum of 85 percent or sometimes 90 percent CLTV.

“Even though the housing market seems to be improving, lenders are wary of approving home-equity loans in an environment in which home prices are not necessarily stable,” Mr. Martucci says. “If the banks lend someone up to 95 percent of their home value and prices drop again, that could quickly become 100 percent loan-to-value or more.”

Mr. Lieb says his bank limits its home-equity loans to 85 percent CLTV, while Navy Federal Credit Union sometimes will go up to 90 percent CLTV.

“Home equity loan approvals depend on neighborhood home values because they depend on the borrower’s equity in the home and the current value,” Mr. Lieb says. “If someone is applying for a home-equity loan in an area where there have been a high number of foreclosures or few sales, then the home may not appraise at a high enough amount for the loan to be approved.”

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