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Is it the next big thing or just a flash in the pan? Only time will tell.
But home equity loans and lines of credit may soon widely feature something that has emerged in recent months on the fringes of the industry: portability.
Portability means flexibility
The option allows some borrowers to transport their equity loans from one house to the next when they move, rather than pay them off at closing. Down the road, the feature may spread to the mainstream, experts say, but only if turmoil in the secondary markets where lenders raise money doesn't drive more pioneers out of the business.
"The purpose of the portability was that you didn't tie the consumer into the house and force them into the position ... where they couldn't sell the property," says Paul Doidge, executive vice president of First Street Mortgage Corp., a Jacksonville, Fla., subprime lender. But because the secondary market for First Street's high loan-to-value portables has dried up, the firm has discontinued the product, he added.
Move it or pay it
The question of portability for home equity lines and loans arises when customers want to move from one house to the next. As it stands now, borrowers almost invariably need to settle all their debts before, or at, closing. Under a standard home equity deal, someone moving from a $100,000 home with an $80,000 first mortgage and a $10,000 equity loan would have to close out both with the sale proceeds, leaving $10,000 to use in the purchase of the second home.
Depending on when a borrower obtained the home equity loan, there might be prepayment penalties for closing it, too.
Crestar Financial Corp., for one, offers a standard home equity deal in some regions where it will pay the average $600 to $800 in costs on loans of more than $20,000. But the Richmond, Va.-based lender, like many others, requires customers to pay that $600 to $800 back if they don't keep the line open for three years.
Bigger loan, bigger problem
The cost of moving is much greater with high loan-to-value loans, such as 125's that place a borrower's mortgage debt at 125 percent of a home's value. Say a customer had $125,000 worth of debt on a $100,000 house in the form of an $80,000 first mortgage and a $45,000 second loan. If that person was to move to a comparably priced home, he could end up owing $25,000 at closing, rather than receiving money.
"All the issues associated with the 125 you'll see down the road," says Neil Sweren, president of American Home Loan Inc., a mortgage broker and lender based in Baltimore. "We ask people, 'Are you planning on moving soon? Are you planning on moving in the next few yeas?' They say 'Yes,' and we ask, 'Do you really want to do this? There could be an issue.'
"Most of them haven't thought about it."
Enter portables
To combat the moving problem, some high loan-to-value lenders quietly started introducing portable loans in recent months
"We offer loans and we are willing to make them portable," says Scott Carnahan, president of DiTech Funding Corp., an Irvine, Calif.-based lender which launched its program this summer. "We do it on a case-by-case basis."
As part of the process, DiTech will release its lien on the first home and convert the borrower's debt to an unsecured loan, he says. After the closing on the second home, the debt would be reattached and secured by that property. Borrowers can either move the entire loan, or pay off a portion and move the rest.
Good credit counts
To use this feature, a borrower must be current on payments and can't have a lot of time between the closing on the old house and the closing on the new one, Carnahan says.
The properties would have to be of equivalent value, as well, if a borrower wanted to avoid paying down part of the balance at closing. That's because moving from one $100,000 home to another doesn't change the dollar amount that is 125 percent of the value of the property. Moving from a $100,000 home to one worth $90,000 does: From $125,000 to $112,500.
FirstPlus Financial Group Inc. of Dallas requires borrowers to provide copies of both the sales contract on the old home and the purchase contract on the new one if they want their second loan to travel, spokesman John Hauge says. The company would also want a closing statement, appraisal for each property and a signed letter confirming the desire to transfer the lien.
Next lender must agree
Customers still may not be able to move their loans, even if their home equity lenders agree to make their debt portable, according to Sweren of American Home Loan. That's because the new home lender may not be willing to write a first mortgage if the borrower plans to pile a second on right away, since doing so would raise the overall debt level to a level the new lender finds unacceptable.
"I have a whole problem with anybody calling it portable," Sweren says. "Your first-mortgage lender may not allow you to attach that anyway."
For now, it is largely borrowers with home equity loans or lines of credit totaling more than 100 percent of the home's value who have the option of carrying their loan to a second property. That's because only a handful of high loan-to-value lenders offer the feature. They have more to lose than standard lenders if borrowers can't come up with enough at closing to pay them off.
Programs may not last
Yet, high loan-to-value lenders have been having problems recently raising money, which may sink the fledgling portability programs.
Consider that most of their home equity loans are sold to investors as securities in much the same way as conventional mortgages. As long as demand for those high-yielding securities held up, companies were able to keep writing new loans, including the more recent portable ones. This summer and early fall, market turmoil scared investors into shedding riskier investments, including securities backed by inherently risky high loan-to-value loans. As a result, new capital for such loans dried up.
First Street's Doidge points out that his company introduced a portable 125 in March. But it had advanced only about $8 million in the loans before it had to discontinue the program. CMG Mortgage Corp., a San Ramon, Calif.-based company, also pulled out of the market.
Traditional banks
Portable loans also have no momentum in the lending world to help them gain industry acceptance, posing another challenge. Traditional lenders really haven't gotten into the game.
Crestar and Wachovia Corp. don't offer them, for example. And spokeswoman Janis Tarter of Golden State Bancorp -- whose California Federal Bank subsidiary is one of the country's largest savings and loans -- said a product manager she asked about the loans didn't even know they existed.
Still, awareness may be picking up in some circles. BankAmerica Corp. recently formed by the merger of Bank of America and NationsBank, has taken preliminary steps toward offering some kind of portable home equity loan or line of credit, according to spokeswoman Laura Hunter.
"It's an area we're very interested in," she says. But "it's still in the very beginning process of discussion."
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