HELOC Originations Make a Comeback in Southern California

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HELOC financing has increased by more than 50-percent in Southern California due to housing appreciation in major metropolitan areas such as L.A. and Orange County as well as additional financing programs coming to market.

HELOCs and fixed-rate second mortgages on expensive homes have enjoyed a resurgence recently due to current market conditions; however, the purpose of the loans has changed significantly from the height of the home equity loan (HELOC) craze prior to the financial meltdown of 2008. Before, homeowners would use HELOCs for luxury items such as boats or expensive vacations. In Southern California, markets with the biggest jump in HELOC originations from June 2013 to July 2014 were L.A.-Long Beach-Santa-Ana at 55% and Riverside-San-Bernardino at 88% year-over-year.

“Surveys of today’s borrowers find the HELOCs are more likely to be used for specific, necessary items rather than an upgrade in lifestyle,” says Chris Arco, President of 1st Nationwide Mortgage. Moreover, we are seeing second mortgages as lines of credit for emergency funds to address expenses like unexpected medical bills or roof repair.

Homeowners of higher priced homes in California have rediscovered the benefits of using this financing for back –to-basics purchases. Second mortgages and HELOCs have come back into acceptance as borrowers can put down only 10 percent towards a loan up to $1.4 million with a first and second mortgage combination. The maximum debt to income ratio (DTI), is 43 percent, and the first loan is fully amortized.

Banks in Southern California report an increase in approvals for second mortgages and HELOCs in contrast to the previous four years, although the current volume does not equal the volume seen at the peak of the housing boom. Homeowners are exercising more responsibility now and applying the home equity proceeds to pay for education or improve the value of their homes.

“HELOCs never disappeared entirely; however, after homeowners experienced the losses in home equity, they became wary of additional debt,” says Chris Arco. “The trend has changed as home prices have stabilized and increased in many areas including Newport Beach and Irvine."

Previously, when homeowners found it easier to qualify for second mortgages and HELOCs, many of them used the proceeds to pay off credit card balances because the interest rates on these loans were far more favorable. In some cases, the interest could be tax deductible, and with the right instructions that the loan was to consolidate debt, many times the banks would not add the credit card payments in the DTI ratio calculations.

Currently, with tighter DTI and credit score requirements, many borrowers do not qualify for a second mortgage to pay off credit card debt. However, a homeowner with a track- record of handling higher levels of unsecured debt may still qualify in today’s market.

Release ID: 66574

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