Second mortgages make a comeback

The Nation's Housing columnist Kenneth Harney writes that researchers at Equifax said total outstanding balances of second home mortgages at banks rose in the latest month for the first time in nearly five years.
By KENNETH R. HARNEY Published: October 13, 2012

— If you have a pressing need to raise some cash, here's some good news: Rising home values are encouraging lenders to revive a product that imploded during the housing bust years: second mortgages.

Researchers at Equifax, one of the three national credit bureaus, said total outstanding balances of second home mortgages at banks rose in the latest month for the first time in nearly five years.

Though the jump was relatively small — about three-tenths of a percent — analysts said any increase in the amount of second mortgages is a bellwether event, indicating major lenders are showing growing confidence that the real estate market has finally made the turn to recovery.

The Federal Reserve recently reported that American homeowners' equity stakes rose by $406 billion in the second quarter, a 5.9 percent increase over the previous quarter and the highest it's been since 2008.

Second loans, which include fixed-payment mortgages as well as floating-rate home equity lines of credit, put the bank in second position in the event of a foreclosure.

Say you have a house worth $250,000 with a $200,000 first mortgage and a $20,000 second mortgage. The proceeds of any foreclosure would initially be used to pay off the lender in the first position. Any remainder would pay off the holder of the second lien. Because lenders assume a “junior” position when they make a second loan, these mortgages are generally considered to be higher risk and carry higher interest rates and fees than a first.

Second loans can be used for a variety of purposes — paying for kids' college tuitions, injecting capital into a small business, financing a home improvement and paying off credit card debts are among the most popular.

Equifax, which receives information from virtually every major bank and mortgage lender, compiles data on a variety of loan products. In its latest National Consumer Credit Trends study, it found that home equity lending appears to be rebounding fastest in New Mexico and California, where outstanding balances jumped by 2.3 percent, along with Nevada (2.1 percent), Colorado (2 percent) and Florida (1.6 percent).