‘High-LTV’ Lending Is on the Rise
When Joseph Yu and his wife, Nadia, took out a new loan on their townhouse earlier this year, they had no idea they were tapping into the hottest new trend in the American home mortgage market.
“All we wanted to do was get out from under our monthly credit card debts,” Yu said. “They were eating us alive.” Yu, a 29-year-old businessman from Germantown, Md., said he and his wife had accumulated $30,000 in credit card, auto loan and other debts over the last several years.
Their minimum monthly payments totaled about $2,200. That was on top of a $900 monthly payment for mortgage principal, interest, property taxes and condo fees on the house.
The solution for the Yu family: To mortgage their town house for more than its market value, and use the bulk of the proceeds to pay off all their consumer debts.
After closing on their new loan, according to Yu, their total monthly payments dropped from $3,100 to $1,424--a 54% decrease. The $2,200 credit card outlay was replaced by a $524 monthly second mortgage payment.
Joseph Yu’s new mortgage financing package is part of the rapidly growing move to what’s called “high-LTV” lending. LTV stands for loan-to-value ratio. If you own a $100,000 house with an existing $90,000 first mortgage and you take out a second mortgage for $35,000, you’ve got an LTV of 125%.
Joseph Yu’s $115,000 town house now has a mortgage LTV of 114%: An existing $91,000 first deed of trust and a new $40,000 second deed of trust funded by American Lending Group Inc., a Gaithersburg, Md.-based mortgage banking company that specializes in high-LTV financing.
Volume Rises
Nationwide, according to Wall Street mortgage analysts, more than $10 billion worth of 100% or higher LTV loans will be financed in 1997--up from just $3 billion in 1996 and virtually nothing in 1995. Volume in 1998 is projected to top $20 billion. The LTVs generally range from 100% to 135%.
“It’s a type of financing that sounds bizarre when you first hear the term,” said Gordon Monsen, a managing director at PaineWebber, the Wall Street securities firm. “It goes against the very core principle of traditional mortgage underwriting, which is that the borrower should have at least some equity in the property--like a down payment.”
But Monsen says home loan-to-value ratios of 100% to 135% “are prudent for lenders and investors”--provided the borrowers have good to excellent credit profiles.
Monsen’s firm, along with other Wall Street giants, pools high-LTV loans from across the country into mortgage bonds and sells them to institutional investors. The credit requirements for borrowers to qualify usually are stringent--higher, for instance, than the minimum standards set by Fannie Mae or Freddie Mac for the mortgages they purchase.
Whereas both Fannie and Freddie insist on credit scores of 620 or higher, typical high-LTV borrowers have scores of 650 to 700 or higher, measured by the popular FICO electronic credit-scoring system developed by Fair, Isaac & Co. and used by lenders nationwide.
Like Joseph and Nadia Yu, most high-LTV borrowers have good incomes, solid jobs and good debt repayment histories. They also have a weakness for credit cards, and are stretched to the limit month after month.
Though a second mortgage industry exists to help debt-burdened consumers with “consolidation” loans, until recently most lenders wouldn’t even consider extending credit where the combined debt loan of the existing first mortgage and a new second exceeded 90% or 95% of home value.
Is high-LTV borrowing for you? Here are some thoughts: A 125% LTV loan isn’t for you if you’ve run up big credit card balances and have been seriously late on repayments. Delinquencies can knock your credit score below the minimums for high-LTV.
High-LTV second mortgages aren’t cheap, either. Typical rates run from about 13%--for the best credit--to 16%. But they’re almost always lower than the 18% to 22% charged by credit card issuers.
Plan Carefully
Don’t plan on moving real soon if you take out a high-LTV mortgage. If you have combined first and second liens of, say, $200,000 on your $175,000 house, you’re going to need to bring money to settlement--not collect it--when you sell. To help on that score, a few lenders are now offering “portable” seconds that you can transfer to a new home, rather than pay off.
A caution: You can’t write off home mortgage interest on debt that’s above the market value of your home. Many high-LTV borrowers appear to be winking at that rule, exposing themselves to possible penalties in the event of an IRS audit.
Distributed by the Washington Post Writers Group.
