Piggy Bank, But No Hammer? (Avoid Your Own Liquidity Crisis!)
In Mortgage Wealth Strategies by Ken Stone (April 26, 2008 12:10 am)
Much has been made of late of the impact of the liquidity crisis on Wall Street – and subprime borrowers. Very little has been made about the impact on middle class and affluent homeowners.
Here’s what I’m concerned about. Americans count on their home equity as a piggy bank of sorts. A piggy bank for bad times – and good – and most importantly for many, for retirement. More and more, as availability of credit shifts, there may be no way to break that piggy bank to get the money without selling the home. And who wants to sell their home in the current market for no other reason than to get access to their home equity?
Here’s what I’m seeing:
Changing Availability of Credit:
Underwriting guidelines have been changing quickly for nearly a year now. Initially changes weren’t easy to detect – even for seasoned originators. I remember having a problem with an owner occupied refinance a year ago – the borrower had excellent credit, good assets in the bank, and their debt-to-income ratios were right in line (they made plenty of money each year). The problem: They were trying to finance to 100% of appraised value (they weren’t even trying to pull money out). Fannie Mae and Freddie Mac both said “no thanks!”
Fast forward to today, and it’s even more limiting. For example, declining property value lists for the country must be checked to see if loan amounts have to be reduced. Often the appraisal can cause this to happen even if your home isn’t in a predetermined “declining market.”
Mortgage insurance companies, which are required in some fashion today with the limited availability of 2nd mortgages at higher loan to values are clamping down as well. For example, earlier this month they announced they won’t be insuring reduced document loans (including stated income – though they’re still available as I write this) as of the end of April 2008. I sent out a blast to a couple of self employed borrowers who were thinking about refinancing and purchasing – the message: You’d better get on the ball or there won’t be a loan available for you. To be clear, there are loans for self employed stated income borrowers. As of the end of April, they’ll just require 20% equity (downpayment with a purchase). To be crystal clear, not needing a stated income loan does not mean you’re home free.
Credit score restrictions are getting uncomfortable as well. Witness the move from a credit score floor that was generally accepted to be 620 – to a new floor of 720. This means borrowers with scores lower than 740 will in many cases pay more for their mortgage. 740 used to be a super credit score – now 740 is the new 620.
To confound matters, the credit scoring models seem to be tightening up – so now it’s harder to get a better score – at a time when a better score makes all the difference.
Home Equity Line of Credit Problems:
The problems are numerous: investors that previously were happy to play at the 100% financing game have severely curtailed their lending practices – many now limit exposure to 80% of appraised value. Investors are now exercising their option to eliminate further draws on a line of credit (many reasons for this – look to my home page for more details here: http://www.mortgageacceleratorprograms.com/ .
Here’s the bottom line. Wall Street won’t securitize 2nd liens any longer – so the portfolio players are all that’s left. No way to pass along the risk – and when that happened, the guidelines tightened up.
As I’ve been saying for years, a HELOC is a fine insurance policy if, and only if, it is fully drawn. Otherwise it’s a wasted effort. You’ll find out how wasted your efforts were if you try to draw on it when you need the money, and your bank informs you they won’t let you. Will this happen in every case? Of course not! But if there’s even a small chance that an insurance policy won’t perform when it’s really needed what’s the point in having it? Withdraw all available money on your HELOC and save or invest it elsewhere if you think you might need the money at any point down the road.
Home Equity as a Retirement Savings Account (Beware!): Many baby boomers have been counting on their home equity for retirement. I’ve written an article about this here – if you fall into this category you’d be helping yourself out to read it:
http://www.threesimpleadjustments.com/retirement-plans-and-real-estate-declines.php
Bottom Line:
Not to be alarmist but if you think you might need access to your home equity, you’d do well for yourself to get it now. If you have an existing HELOC pull the money out using that vehicle. If you don’t, start the process of getting a new mortgage (could be a new HELOC – could be a new first mortgage). Talk with a mortgage planner about the best way to access your home equity. Underwriting guidelines are only getting more restrictive – so your best chance is now. The trend for more limitations continues – and in many cases changes are announced on their effective dates.
To your optimized financial health,
Ken
1 Comment »
RSS feed for comments on this post. TrackBack URI
Leave a comment
Your blog is interesting!
Keep up the good work!
Comment by AlexM — August 18, 2008 @ 8:03 am