Drive along Interstate 95 near Norwalk, Conn., and you'll see a conspicuous billboard that advertises the hottest product in home equity lending today: the 100% loan-to-value second mortgage.
Shawmut Bank's ad is one example of the proliferation of 100% LTV loans at banks across the country.
"It is clearly becoming a more popular product," said George R. Yacik, vice president, SMR Research Inc., Budd Lake, N.J.
Banks as diverse as First Chicago Corp., Union Planters Bank of East Tennessee, National City Corp., and First Federal Savings and Loan of Rochester, N.Y., are dabbling in varying degrees with the loans, in which borrowers can draw on all the equity in their homes.
While no figures on 100% LTV loan production are available, David Olson, a consultant specializing in home equity lending, said loans with loan-to- value ratios higher than 95% for first and second mortgages combined have skyrocketed in the last two years.
From 1992 to 1994, the percentage of such loans more than doubled to 28%. In 1989, only 6% had 95% LTVs are higher.
Mr. Olson said lenders are almost forced to make such loans because of the popularity of credit cards and auto loans. He said only by lending up to 100% LTV can bankers spur additional loan growth.
"There is not much place if you don't go to 100%," he said.
Also, the percentage of all conventional first mortgages with LTVs higher than 90% has been climbing markedly over the last year, according to the Federal Housing Finance Board. At the end of December 1993, 19% of all home loans had LTVs of 90% or more. A year later, it was 28%.
That leaves less equity to lend against for second-mortgage lenders.
Charles T. Bryant, president, Union Planters Bank of East Tennessee, Knoxville, said customers are demanding 100% LTV loans. And the product is proving lucrative for the subsidiary of Memphis-based Union Planters Corp.
But Mr. Bryant remained cautious about the product. He said it was imperative that Union Planters "handle it right."
"You might say it is risky, but we control it through our credit standards," he said. "People don't usually miss their home payments."
It is exactly that thinking that can get - and has to some degree already gotten - lenders into trouble, said Mr. Olson, the consultant.
"To me, it is dangerous stuff," he said. "If there is a recession and there is some deflation then we are going to have some problems. It is certainly a treacherous area to get into."
Already talk of losses has surfaced. Net chargeoff from firms that specialize in B-to-D lending, which often do 100% LTV loans, steadily climbed 50 basis points from 1990 to 1994 to 1%, Mr. Olson said.
But some lenders are cocksure about 100% LTV home equity loans.
Mike Ramey, vice president, National City Corp., Cleveland, reasons that 100% financing is available for autos, which depreciate. Why not for homes, he asks, which appreciate? National City now does 100% LTV home equity loans on a limited basis, he said.
