In some cases, homeowners who in the past would have been easily approved for a mortgage refinancing are finding that they can't get their home-equity lender to give the go-ahead, which is required to complete the transaction. Others are being told by their home-equity lender that they need to reduce the size of their loan or line of credit.
Approvals from home-equity lenders used to be routine, particularly if the borrower wasn't increasing the size of the mortgage as part of the transaction. But that's no longer always the case -- even in places where the housing market hasn't been hit by huge price declines.
Such approvals, known in the industry as "subordinations," mean that the home-equity lender agrees to stand in second place behind the new mortgage and allow the existing first mortgage to be replaced by another first mortgage.
Many mortgage re financings continue to go through without a hitch. But some homeowners who want to lower their rates or lock in a fixed-rate mortgage can't, even if refinancing would save them money and put them in a better position to repay their loans.
"For borrowers trying to improve their situation, this is a nightmare," says Richard Redmond, a mortgage broker in Larkspur, Calif. That's because getting a new home-equity loan to replace the old one in order to get a refinancing approved "may be impossible," he says, as many lenders have significantly tightened their standards as housing prices have fallen.
During the housing boom, many borrowers used home-equity loans as a way to buy a home with little or no money down without having to pay for private mortgage insurance. Others turned to these loans to pay off higher-cost debt or to finance renovations and even vacations. The dollar value of home-equity loans outstanding stood at $1.1 trillion in the third quarter of 2007, according to the Federal Reserve.
The higher hurdles for borrowers come at a time when home-equity lenders are reeling from rising losses in the face of higher delinquencies and falling home prices. More than 5% of home-equity loans were at least 30 days past due in January, according to Equifax and Moody's Economy.com, up from 4.4% in December and 3.4% a year earlier. Delinquencies on home-equity lines of credit have also risen, to 2.2% in January, from 1.9% in December and just 1.2% a year earlier.
Lenders extended an estimated $456 billion of new home-equity loans and lines of credit in 2007, down from a peak of $504 billion in 2006, according to SMR Research in Hackettstown, N.J.
In an effort to stem future losses, home-equity lenders have tightened their standards by, for example, significantly cutting back on how much of a property's value borrowers can finance. They are also going back to some borrowers and freezing their home-equity lines of credit or reducing the maximum amount they can borrow. Charlotte, N.C.-based Bank of America Corp., for instance, began notifying some of its customers last month that it was blocking access to their home-equity lines because of falling home prices.
Cleveland-based lender National City Corp. last month stopped approving refinancing requests from borrowers who received a home-equity loan from the lender through a mortgage broker. Kristen Baird Adams, a National City spokeswoman, says the move was "consistent" with the company's decision last summer to stop making loans through mortgage brokers.
