While mortgage lending and home equity lines of credit have picked up at local banks this year, second mortgages, also known as junior lien mortgages, have declined, a sign that banks still have little appetite for riskier loan products.
Junior lien holders get in line behind first lien holders when a borrower defaults, and junior lien holders have more difficulty recouping their losses.
During the run-up to the financial crisis, it was common for home buyers to borrow the entire purchase price by getting a 30-year first lien mortgage to cover 80 percent of the price of the house. A second mortgage, for a shorter term and a higher interest rate, known as a piggyback loan, would cover the rest. It was an alternative to buying private mortgage insurance.
But the days of piggyback loans are pretty much gone, said Wayne mortgage broker
While first lien holders can recover most of their losses by repossessing and selling the house, holders of second liens, often a different bank from the one with the first lien, are left holding the bag.
Therefore many banks have backed away from making second mortgages, said
Unlike first lien mortgages, most of which are bundled together and sold as bonds, banks are more likely to hold second mortgages on their balance sheets and are therefore more directly exposed to the risk of default.
According to a review of second-quarter financial reports from 19 northern
Lenders say that stabilization of home values in
Banks are generally reluctant to lock in today's very low interest rates for extended periods, but they are promoting variable rate home equity lines, which pose less interest-rate risk for lenders who are luring borrowers with teaser rates of less than 3 percent in some cases.
"People are more attracted to the home equity lines," said
With interest rates still historically low, and not expected to change much for at least a year, most banks are not eager to put more fixed-rate, 20-year second mortgages on their books, Gumbinger said.
From the lenders' point of view, "the argument is more in favor of making equity lines of credit," he said.
"When people refinance, generally speaking they consolidate their debt and pay off their second mortgages, and if they have the equity, that's the time to get a home equity line just in case they need it," he said.
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