Tuesday, October 11, 2011

MORTGAGE & FINANCE: Lenders still keeping credit on a tight leash

Few homeowners can count themselves among the lucky

Jo-Ann Taddeo is one of the lucky ones.

Though she has no debt on her $400,000 house in Medford, her initial application for a home-equity line of credit was rejected. The bank feared she couldn’t pay back the loan.

So Taddeo, 58, a sales representative for a food-services company, wrote a detailed letter asking Century Bank to reconsider and explaining how she planned to use the money. The bank ended up approving a $75,000 line of credit with a 2.99 percent variable interest rate.

“I’m extremely happy,’’ Taddeo said. “I feel so relieved. It’s a great weight off my shoulders.’’

Taddeo’s saga is both typical and atypical for homeowners seeking home-equity loans and credit lines.

What’s typical is the ongoing challenge for homeowners to get a home-equity loan or a credit line, even for someone such as Taddeo, who has 100 percent equity in her home.

What’s unusual is that Taddeo did get the money. Even applicants with solid credit and equity in their homes continue to be rejected by a wary financial industry.

“It’s still tough out there,’’ said Keith T. Gumbinger, vice president a HSH Associates, a financial survey and publishing company in New Jersey. “The market for these loan products is still tight. Many people are wary. Things are marginally loosening up, but not by much.’’

The numbers bear out his assessment.

Three years after the meltdown on Wall Street and ensuing credit crunch, the home-equity loan and credit-line markets are struggling. That makes it hard for many homeowners who want to undertake renovations or borrow money for college tuition and other big costs.

Volume for fixed-rate home-equity loans was $158.8 billion in August, down 13.3 percent from the same month in 2010 and about 42 percent off its prerecession 2007 total, according to Equifax Inc., the credit reporting agency.

The market for home-equity credit lines - also known as revolving loans, they allow homeowners to periodically draw down smaller balances of available credit - is doing slightly better.

The home credit-line market stood at $594.6 billion in August, down about 6.5 percent from the prior year, according to Equifax. But the overall US credit-line market is still slightly above prerecession levels, according to Equifax data.

Several factors are keeping the market tight, though not impossibly restrictive: falling home values, which are wiping out equity for homeowners to borrow against; banks’ tougher lending standards; and customers who are reluctant to take on debt during turbulent times.

But there are ways to get home-equity loans and credit lines. Here’s what to expect at the bank:

Tighter lending standards

Banks want homeowners to have a minimum of 20 percent equity built into their homes before they will consider extending credit.

The problem is that the stagnant real estate market has kept most home values flat or pushed them below the value of the mortgage.

Banks don’t want to end up with a borrower who is underwater - one who owes more on a house than it is worth. So they are requiring formal real estate appraisals.

“It’s little bit of a rude awakening for some people,’’ said Ken Dyment, consumer finance director at Eastern Bank, when home values are lower than expected. “They often think their homes are worth a lot more.’’

The bottom line: Lower home values, combined with tougher loan limits, lead to smaller home-equity loans and credit lines.

Credit scores, etc.

Banks prefer borrowers to have a minimum credit score of 720.

“Before, they didn’t care as much about credit scores,’’ Gumbinger said. “Now, banks want solid credit scores.’’

And be prepared to produce paper: about your income, assets, and job status.

Much of the falloff in home-equity lending is because large national banks have dramatically pulled back, industry officials say. Many regional and community banks, however, are still lending, and in some cases they are trying to pick up the slack.

“We’ve picked up business all over the place from the big banks,’’ said Tim Glynn, senior vice president at Century Bank in Medford, where Taddeo got a line of credit.

Rockland Trust is seeing “tremendous growth’’ in its home-equity business this year, said Jane Lundquist, executive vice president. Its home-equity business has jumped about 10 percent.

At TD Bank, home-equity loans are up about 5 percent over the past year.

“We have plenty of money to lend to the right customer,’’ said Michael Copley, executive vice president.

And Citizens Bank has launched an aggressive campaign to nab a larger share of the home-equity market, said Cheryl Nolda, president of home-lending solutions.

Borrowers are seeking home-equity loans for a variety of reasons, bankers say, including to pay off large bills, such as for college tuition, as well as to pay for simple repairs.

Many homeowners, surveying the rough housing market and economy, have opted to stay in their houses rather than move. So they apply for home-equity funds to pay for new roofs, porches, bathroom improvements, and other small projects.

Loan applicants can improve their odds if they do other business with the lender. A Bank of America spokesman said homeowners who refinance a mortgage or open an investment account may have a better chance of landing a home-equity loan.

Chris Shedd, owner of Mortgage Resources Inc. in Wellesley, said more banks are linking home-equity lines to other products, such as a refinancing.

“They want the extra business,’’ Shedd said.

By Jay Fitzgerald Boston Globe October 2, 2011

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