CHICAGO -- The downturn in the housing market, with new home starts at their lowest level since 1981 and resales flat in many parts of the country, has curtailed demand for first mortgages on those homes and sent lenders' business tumbling.
But one bright spot on the mortgage horizon could be home equity loans, both full second mortgages and equity lines of credit, which lenders say are as popular as ever.
"Even though volume of first mortgage loans is off 20 to 30 percent, second mortgage production has not fallen off," said Todd Hempstead, assistant director of negotiated transactions
for the Federal National Mortgage Association, known as Fannie Mae.
"When homes aren't selling, people don't move. Instead they start to improve their homes," he said. "And equity loans are one of the few means consumers have to write off the interest on taxes."
For the 1990 tax year, taxpayers will be allowed to deduct only 10 percent of all the non-mortgage interest they paid. After that, the deduction disappears. But mortgage interest and most interest paid on home equity loans will remain fully deductible.
Along with the tax advantage to consumers, second mortgages have some advantages for the banks and other lenders that originate the loans, making it likely that they will be readily available at a competitive price, according to analysts who spoke at the annual convention of the Mortgage Bankers Association of America held recently in Chicago.
Currently, interest rates on second loans vary from 10 3/4 percent to 13 percent or more.
The popularity of second mortgages is sparking a related interest in the secondary market for these loans, a market that has been slow to develop in the past because of the wide variety of second mortgages that lenders issue.
In the secondary mortgage market, government-chartered agencies and private investors buy loans from mortgage originators, who can use the proceeds to make more loans.