Second Mortgages in Today’s Market

When it comes to the current economy, nothing is as easy as it used to be, including getting a second mortgage or home equity loan. “In the past, the money tap was turned on full blast; now the spigot is tight and the lines are dry,” says Bobby Horvath, senior mortgage banker at Pulaski Bank. “Home values have fallen. Loans are a lot more difficult to acquire than they were 18 months ago.”

    Gone are the days when some banks would offer a loan of up to 100 percent of the perceived value of your home, he notes. “Easy credit based on high home values drove the economy, but the boom was built on a false foundation,” Horvath says. “Banks were lending when they shouldn’t have. The economy made huge gains, but they were unsustainable. When those loans quit performing, the market plummeted and people lost jobs, and in many cases, their homes. Now we’re coming back to reality with a thump.”

    To qualify for a mortgage today, applicants must substantiate their income with full tax returns or W2 statements. “But even with proof of a healthy income, it’s still not easy to get a second mortgage,” Horvath says. “In addition to your income and assets, the bank will look at a reappraisal of your home and your credit. A 650 credit score and a smile are no longer enough.”

    For those who qualify, the money is out there. “But most people don’t seem to want loans right now,” Horvath says. “They’re saving, not spending. They’ll spend less until they feel more secure. It’s going to take awhile.”

    Drew Luning, vice president of USA Mortgage, says that some money is available, and it’s cheap. “The rates are low because prime rates are low, and they’ll stay low for some time,” he says. “Home loans are still a good way to borrow, particularly if you need to make home improvements or consolidate debt.”

    But because lenders are concerned about the drop in home values, applicants can’t expect to borrow as much as they could 18 months ago. “It’s still not what it used to be, a couple of years ago, banks were making home equity loans of up to 100 percent, and sometimes more,” Luning says. “Now, lenders have reduced combined loan-to-value (CLTV) limits to 80 or 85 percent. Depending on the situation, some lenders will go as high as 90 percent CLTV, but they’re very selective. You’d better have a strong home value and a strong income.”

       More stringent standards mean that the days of verbal agreements are long gone, says Barry Feldman, vice president of Bank of America Home Loans. “Before the market fell, you could easily get a second mortgage on a handshake,” he says. “Now the process is similar to getting a first mortgage: all information regarding income and assets must be documented. And lenders want at least 20 percent equity left in the property. In the past, you could yank all the equity out.”

    Lenders will stay cautious, he predicts. “Things appear to be settling down, but everyone’s worried about what might happen next,” he says. “No one knows what’s going on. Everything’s gone crazy.” Fortunately, he adds, St. Louis went less crazy than other parts of the country. “Home prices here didn’t appreciate as rapidly as those on the East and West coasts, so there wasn’t as steep a decline when the bottom fell out of the market,” Feldman says. “The Midwest was steadier, so the impact wasn’t as drastic. That’s why Bank of America still loves doing business in the Midwest.”