125% Second Mortgages Are Back Again…

September 5, 2013 No Comments »
125% Second Mortgages Are Back Again…

It feels like we’re getting dangerously close to repeating history in the worst way possible.

High-risk loan programs that seemed extinct were perhaps only endangered, as evidenced by a new product launch over at CashCall, an Orange County based company that offers both personal and mortgage loans.

Yep, they’re offering 125% second mortgages, and no, I’m not talking about HARP loans for those underwater on their mortgages.

This is a bona fide “no equity home loan,” a mortgage instrument popular during the housing boom that quickly disappeared once values began to take a dive.

How the 125% Second Mortgage Program Works

Essentially, those who wish to borrow more than their home is worth can apply for one of these loans if they meet certain conditions.

For example, if your home is only worth $200,000, but you want to borrow $250,000, this loan will allow just that.

This differs from a traditional cash-out refinance, which typically requires a homeowner to have some equity buffer, such as 20% or more.

These types of loans worked back in the day on the expectation that home prices would continue to rise over time, and eventually the homeowner wouldn’t be “underwater” any longer.

They failed because (as we all know) home prices eventually stopped going up, and homeowners with giant mortgage balances had already spent the cash elsewhere, and had no intention of paying it back once their property values were cut in half.

This particular 125% second is a 15-year fixed loan, and only requires a minimum FICO score of 660, which is pretty below average for this level of risk. It must also be an owner-occupied property.

The minimum loan amount is $25,000 and the max is $150,000. For attached condos, they actually limit the CLTV to 100%, seeing that condos are generally deemed higher risk.

Oh, and the max DTI ratio is 50%, though pricing is more favorable for those who keep it at or below 43%.

Speaking of pricing, rates range from as low as 7.49% to as high as 14.99%, depending upon the CLTV.

Here’s the rundown based on what I saw advertised today:

0-80% CLTV: 7.49%
80.01-90% CLTV: 9.49%
90.01-100% CLTV: 11.99%
100.01-125% CLTV: 14.99%

For the record, these rates are good for those with FICO scores of 700 and higher. I don’t want to know how high the rates are for those with lower scores.

There are also fees of 3% of the loan amount for DTI ratios at or below 43%, and fees of 5% for DTIs between 43.01% and 50%.

What the Heck Is CashCall Thinking?

One last thing I should mention is that this program is only available in California.

The Golden State has been looking good lately in terms of home price appreciation, and it will probably continue to enjoy higher prices as the recovery goes on.

Perhaps this is why CashCall is happy enough to offer extra-high CLTV loans in the state. After all, homes that sold for $500,000 two or three months ago might sell for $600,000 today. It’s out of control.

Additionally, I’m assuming the company relies mainly on refinance business, and because of the recent rise in rates, it lost a lot of business, just like any other shop relying on refinances to bring in the bacon.

So this appears to be a more aggressive move to offer something the competition doesn’t have, which could lead to an uptick in business to make up for that decline in refinancing apps.

Still, it reminds me of why the mortgage boom went bust, and it’s pretty scary that these types of products have returned just a couple years since the market bottomed.

Let’s hope home prices continue to rise…

(photo: Marcin Wichary)

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