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Credit Research Part 4: Second Mortgages Decline Post-Recession

I've been blogging about the impact of the Great Recession on first mortgages, most recently examining mortgage delinquency rates. In this entry, I turn my attention to second mortgages. Recent FICO research shows that there are now significantly fewer US consumers with such loans. And despite the fact that housing prices have steadily recovered over the past 2+ years, there is no indication that consumers are beginning to leverage any of that additional equity.

As in my prior posts, I'll focus on mortgage-related trends in six Metropolitan Statistical Areas (MSAs): Miami, Phoenix and Las Vegas as examples of cities that had a more pronounced contraction during the recession, and San Francisco, New York and Washington D.C. as areas that weathered the crisis comparatively well.

In the first phase of our analysis, we classified second mortgages into two broad categories: revolving Home Equity Lines Of Credit (HELOCs) and closed-end home equity loans. As shown in the table below, there are notable differences across MSAs as far as preference for each loan type.

Mortgage research 1

Across all time periods, San Franciscans appear to have a stronger preference for HELOCs over home equity loans, compared to consumers in other cities. It’s not clear whether this is a result of what the banks are marketing in the Bay Area or whether San Franciscans just prefer the revolving feature of the HELOC.

To examine aggregate trends, we combined both types of second mortgages for the next part of our study.

Mortgage research 2

As this chart illustrates, the percentage of consumers with both a first mortgage and an active second mortgage continues to decrease relative to the peak in 2007. Across all six MSAs, the 2013 rate is at least one third lower than it was in 2007. For example, 21% of Las Vegas first mortgage customers had a second mortgage in 2005; that figure dropped to just 9% as of 2013, a reduction of 55%. This decline in active second mortgages has not yet leveled off in any MSA in this study.

The demand for second mortgages is driven largely by available equity and consumer demand for credit in general. Since available equity is driven by housing prices, let's examine Freddie Mac’s House Price Index (HPI) over the same 2005-2013 timeframe.

Mortgage research 3

For homes with first mortgages booked prior to 2008, there may be little available equity. But for loans booked after 2009, equity is certainly beginning to emerge.

Furthermore, we know that during the refinance boom of 2009-2011, many savvy consumers refinanced their first mortgages to take advantage of historically low mortgage rates. Those consumers are beginning to have built up sufficient equity to consider opening a second mortgage.

My sense of the situation, however, is that consumer demand for credit has yet to fully thaw, although there are early signs that this may be changing. Bloomberg recently noted an increased demand for auto and student loans, although the increase in demand for revolving loans has been weak. Fannie Mae has recently noted a similar mild increase in demand for mortgages. In any case, for now, it is clear that fewer consumers are leveraging their home equity via a second mortgage.

If you missed my earlier posts in this mortgage research series, be sure to check out parts one, two and three. Analyzing these trends as a whole, the US mortgage industry generally appears to be in a quiet period of recovery, with measures such as delinquencies trending downward and new account openings trending upward. If housing prices continue to increase at a steady rate, consumer home equity will grow. And starting in 2015, adverse information on consumer credit files associated with the mortgage subprime crisis and subsequent recession will start to be purged from these files. Thus, I anticipate growth in the mortgage market to accelerate at a faster pace beginning in 2015.

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