By Patrick Rucker - Analysis
WASHINGTON (Reuters) - U.S. homeowners who bought using 100 percent financing, and those who took out “home equity” loans against the value of their properties, even though they have good credit ratings, could be the next to cause problems in the U.S. housing market.
In recent months, borrowers with poor credit histories have resulted in about 20 lenders and mortgage brokers going out of business as defaults have risen in the so-called “subprime” sector of the home loan markets.
But as U.S. house prices continue to fall, following the boom in property prices which ended in 2005, even borrowers with good credit records may have problems as the value of their homes may now be less than the debt they owe.
Many recent home buyers bought through 100 percent financing programs known as “piggyback” loans, which relied on one mortgage for 80 percent of purchase price and other financing for the remaining 20 percent.
Such financing was safe while home prices were rising, as borrowers could easily sell homes for a profit even if they could not make mortgage payments.
But in today’s market of flat or even falling home prices, lenders can get stuck with properties that have lost value if borrowers end up in foreclosure.
“Piggyback loans could be the next skeleton to fall out of the mortgage industry closet,” said Howard Glaser, an independent mortgage analyst in Washington, D.C.
“These 80-20 loans give the borrower the illusion of being able to afford more house than they really have the funds for.”
From mid-2005 to mid-2006, 29 percent of new mortgages involved no deposit by the purchaser to create some equity in the property, according to the National Association of Realtors. Analysts are worried.
“When we went out to visit our clients on the West Coast, this was a prime area of concern,” said Frederick Cannon, a mortgage industry analyst at Keefe, Bruyette & Woods.
Lenders including Countrywide Financial Corp. CFC.N Fremont General Corp. FMT.N and IndyMac Bancorp Inc. NDE.N have large volumes of “piggyback” financing, and all said it has proven problematic for many first-time homebuyers, Cannon said.
Another type of financing which could cause problems in the housing sector is the “home equity” loan, taken out by a homeowner against the net value of the property to finance home improvements or other consumer spending.
Home equity lines of credit, or HELOCs, grew from $151 billion to $559 billion from 2000 to 2005, according to the Federal Deposit Insurance Corp.
In a regulatory filing Thursday, Countrywide said 2.9 percent of its prime home-equity loans were at least 30 days late at the end of 2006, up from 1.6 percent a year earlier and 0.8 percent at the end of 2004.
Unlike the subprime sector of the home loan market, “piggyback” loans and HELOCs were popular up and down the credit scale, said Keith Leggett, an economist with the American Bankers Association.
“It all depends on when you did your purchase,” he said. “If you got in the market in 2004, you have price appreciation. If you got in late 2005, you have no price appreciation.”
Home equity loan borrowers, even with good credit records, will be the next crisis in mortgage financing, said Josh Rosner, a housing analyst with independent research firm Graham Fisher & Co. in New York.
“Second lien holders and second lien HELOC lenders to prime borrowers are in as much of an ‘at risk’ position as subprime mortgage lenders,” Rosner said. “The recognition of their problems is just ahead of us as they will default more slowly.”
Latecomers to the housing market who have piggyback loans or HELOCs, and hold mortgages with low initial payments may strain to keep up as their costs rise, he said.