Ballooning credit card debt among American consumers is stoking demand for a new -- and potentially risky -- home mortgage product: a loan that allows you to borrow up to 125 percent of what it's worth.
Lenders across the country are scrambling to offer what some industry analysts believe will be the hottest mortgage concept of 1997.
Wall Street mortgage market analyst Jonathan Lieberman, a senior researcher for Moody's Investor Services, predicts that lenders will make more than $7 billion worth of no-equity and negative-equity home mortgages in 1997, up from just $200 million in 1995 and $3 billion in 1996.
No-equity lending appears to turn long-standing rules of real estate mortgage underwriting upside down.
Whereas banks historically have insisted on borrowers having some stake in their property -- a down payment of 10 percent to 20 percent for a new loan, or an equity position of 10 percent or more for a refinancing -- negative-equity lending requires no stake whatsoever.
In fact, according to a new study authored by Lieberman, most lenders offering negative-equity loans don't even bother getting a formal appraisal of loan applicants' homes.
They settle instead for what's known in the trade as a "drive-by" -- a quick look at the home and the neighborhood -- to gauge its rough market value.
The typical no-equity mortgage runs anywhere from $10,000 to $100,000 and carries a note rate of 13 percent to 14 percent.
The typical borrowers, according to Lieberman, are an individual or couple with "basically good income and credit" -- no defaults or foreclosures -- but who have run up heavy credit card and other consumer debt during the past year or two.
"Their credit cards are eating them alive" at interest rates of 19 percent to 21 percent or higher, Lieberman said.
Fifty percent to 60 percent of their monthly income has to go to payments on their cards and their existing mortgage.
What options do debt-drenched homeowners have?
The answer offered by the growing ranks of no-equity lenders: Convert your credit card debts into mortgage debt -- even if the resulting total mortgage balance exceeds the resale value of your real estate by a substantial amount.
The rate on such a mortgage is lower than what you pay on your cards, and the 15- to 20-year payback terms are much longer -- thereby reducing your monthly payments.
