Homeowners scrambling for cash breathe new life into second-lien mortgage market

By Joy Wiltermuth

More borrowers are tapping their homes for cash, two years after the Fed began raising interest rates

Second-lien mortgages have been getting a new lease on life as more borrowers tap their homes for cash two years after the Federal Reserve began jacking up interest rates.

With an estimated $30 trillion in equity in their homes, borrowers have been turning increasingly to home-equity lines of credit and second-lien mortgages, or "piggyback" loans, for a liquidity spigot.

Wall Street anticipates this year it will turn about $11 billion of second-liens and home-equity lines of credit into bond deals, up from less than $1 billion annually four years ago, according to BofA Global analysts.

"Activity has picked up, and it has for us," said Eileen Tu, vice president of product development at Rocket Mortgage (RKT), in an phone interview with MarketWatch.

"Many people refinanced and have low interest rates of 2%, 3% and 4%," Tu said, resulting in many homeowners clinging to their existing 30-year fixed-rate mortgages. "A lot of people don't want to touch that now."

But as credit-card rates have set fresh records above 20%, more homeowners have been opting for second liens, a riskier type of debt that sits behind a first mortgage. The proliferation of second liens some 15 years ago was blamed for exacerbating the global financial crisis because they helped put people in homes they couldn't afford.

Federal Reserve staff, in a 2012 paper, estimated that up to 45% of homes purchased in coastal markets and "bubble locations" included a home-equity line of credit or a closed-end second lien.

Now, however, overall second-lien balances account for only a fraction of the roughly $13 trillion residential mortgage market. Unlike in the last housing boom, most borrowers dipping into their home equity also have prime credit scores and fit the government's more stringent lending standards rolled out after the wreckage of 2008, which were designed to limit fallout to families and to financial institutions.

"I'm not worried about it at all," said Laurie Goodman, a fellow at the Urban Institute, a think tank. "These are not the second liens of 2006 to 2007, where people were levering up their homes."

Fed staffers estimated that second-lien balances peaked at more than $1 trillion in 2007. After increasing by $11 billion in the fourth quarter of 2023, there were about $360 billion in outstanding home-equity lines of credit, according to the New York Federal Reserve. The report didn't specify how much in total second liens were outstanding.

Goodman, who spent 30 years as a Wall Street analyst and researcher, said she thinks the new market for second liens has room to run, given that the Fed isn't expecting to dramatically cut rates this year.

"For many people, the second lien is going to be their most economical options," Goodman said. "I don't see rates going down that low again."

Mortgage Daily News pegged the 30-year fixed mortgage rate at 6.87% on Monday, up from less than 3% in December 2020.

Fitch Ratings said a recent $370 million bond deal of more than 5,000 Rocket Mortgage second liens had a roughly 75% loan-to-value ratio and a 10% weighted-average coupon.

"For us, we do see this as a great option, one that's bigger than anticipated three to four years ago," said Tu at Rocket Mortgage.

U.S. stocks ended mostly lower Monday, but remained near record highs. The Dow Jones Industrial Average DJIA was up 2.9% on the year through Monday, while the S&P 500 index SPX was 7.3% higher and the Nasdaq Composite Index COMP was up 6.7%, according to FactSet.

-Joy Wiltermuth

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03-11-24 1937ET

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