For homeowners with no intention of accessing their credit line, the suspensions are not a big deal.
But for others wanting to borrow, the letters -- which sometimes gave only a one-day notice or came after checks had been written against the accounts -- put them in a bind.
Some of the nation's biggest lenders, including Chase and Countrywide Financial, began freezing or reducing home equity lines of credit late last year -- particularly in areas such as California and Florida, where home values have plummeted.
But within the last few weeks, at least one Cleveland-based institution, AmTrust Bank, began sending letters to Ohio customers saying their lines of credit were frozen because of declining home values.
While other area institutions confirmed they have suspended additional borrowing in other states, they would not confirm whether they've done it in Ohio.
Homeowners should be prepared for it, though, said Guy Cecala, publisher of Inside
Mortgage Finance, an industry newsletter.
"Everybody's going to see it. It's just a matter of time," Cecala said. "What's happening is a move to protect lenders. I'm not sure I'd agree that you're protecting consumers or borrowers with it."
Cecala, based in Maryland, said the move was a "knee-jerk" reaction from lenders who may lose business as a result.
He said it's a good time to access those credit accounts, which allow homeowners to borrow against the equity in their homes for such things as home improvements, college tuition or emergency expenditures.
Interest rates on home equity loans are at record lows of about 5 percent to 6 percent.
According to Cecala's publication, a high of $430 billion in home equity was tapped in 2006. In 2007, borrowers tapped $355 billion, the first year the volume dropped since the newsletter began tracking in 2001.
"People were using houses like ATM machines over the past five years," Cecala said.
While lenders are still opening new accounts, they're using stricter standards.
At one time, lenders allowed homeowners to borrow 95 percent to 100 percent of their home's value. When the home-sales market fell apart, appraised values fell, too, meaning that many borrowers had more debt than their homes were worth, said Greg McBride, a senior analyst with Bankrate.com, based in Florida.
"We got to the point where if you had a pulse, you could get a loan on the full value of your home," McBride said.
While it's a natural reaction to be offended by a lender freezing a line of credit, those decisions aren't made on a personal basis, McBride said.
"It's like walking through the door at the end of the day and the dog growls at you for no reason. 'What did I do? I've been responsible.' This is not borrower specific. It's not personal. This is big-picture macro," he said.
Institutions offering lines of credit have reason to be worried. In cases of foreclosure, the primary mortgage banker collects on debts ahead of the equity line of credit lender, putting the secondary lender at greater risk.
How it's determined
In Ohio, record foreclosure rates and falling home prices probably contributed to the suspension decisions, McBride said. The freezing of lines also is not an indication that a lender is in any financial danger, he said.
"Some of the strongest financial institutions are the most prudent when it comes to risk management," he said.
Lenders said they use third-party data to determine housing prices in an area. Cecala said in some cases he's heard of lenders making blanket decisions based on their housing data for large areas, if not entire states.
"The national lender is not going around using Realtors or appraisers. They're using some database that may or may not be right," he said.
Still, the equity-line freeze could serve as a reality check for homeowners, McBride said. It could be an opportunity to find another lender, or an eye-opener that home values have indeed declined and the owner has too much debt.
"In truth, it's very common for people to say the value of my home didn't fall, just like no one ever admits to being a bad driver," McBride said.
To challenge a lender on the credit freeze might require a new appraisal, which typically cost $250 to $300. Or a lender may be willing to pay the appraisal and closing fees to lure away another bank's unhappy customer, Cecala said.
But those new home equity lines will be scrutinized more.
Frozen credit lines
Chase will only offer a maximum loan-to-value ratio (the total first-mortgage and credit-line debt as a percentage of the home's value) of 85 percent, said Tom Kelly, senior vice president for Chase Home Lending. That's down from 95 percent and 100 percent, Kelly said. The bank dropped to 90 percent in August and 85 percent in January.
In parts of Nevada, where prices have plummeted severely, the ratios are 60 percent, said Kelly.
Kelly said Chase has frozen some home equity lines of credit, but said the company does not break out the markets in which the letters were sent. Kelly also declined to disclose how many letters went out, except to say that it was less than the 122,000 letters lender Countrywide sent out in January.
Similarly, National City Bank would not say how many lines it had frozen or whether there were any in Ohio. The bank would only say the action took place nationwide and only affected consumers who received their home equity lines through the bank's former National Home Equity business, which was closed last August though the loans are still maintained by National City. Spokeswoman Kelly Wagner Amen said equity lines that were originated in branches have not been frozen.
AmTrust Vice President and Marketing Communications Manager Donna Winfield said she did not know how many lines the bank had frozen and said the letters went out nationally as well as in Northeast Ohio. The bank, formerly Ohio Savings, is asking customers to seek a reappraisal to make their case if they disagree with the bank, but also will review accounts case by case. "It's all about responsible lending and helping to make sure homeowners aren't over extending themselves," Winfield said.
FirstMerit Director of Corporate Communications Tom O'Malley declined to say whether the Akron-based bank had frozen any home equity credit.
"We've always had tight standards. What we're noticing is the industry is moving more in line to where we have already been," he said.
Still originating loans
But not all financial institutions are freezing lines.
Huntington spokeswoman Sandy Upperman said the bank hasn't frozen any lines and is originating loans at record levels.
Officials at several community banks and credit unions said they had not frozen home equity lines.
North Akron Savings President Steve Hailer said his bank would stand by the terms of the equity lines it has written, which in some cases have been 90 percent loan-to-value ratios. The bank has very low delinquency rates, he said. "We've got confidence in our underwriting and we have confidence in Summit County. I know we've been hit hard, but this is where we live and work and we made a deal with somebody and we're going to honor it," Hailer said.
The reaction by the larger lenders could be a good opportunity for smaller community banks and credit unions to gain business, said mortgage newsletter publisher Cecala.
"It's been a revival to the small neighborhood or local lender," he said.
Freezing or reducing of home equity lines is the new reality, said Cecala.
"I've heard of cases where people said if they'd known the lender was going to cut it off, they would have drawn it down," he said. But Cecala said it also makes sense that lenders don't want to give people too much notice that their lines are being frozen so excessive spending doesn't happen.
Some lenders, like Chase, said they might be willing to open a frozen line to homeowners in "special circumstances," such as those in the middle of a home renovation or someone who has a tuition bill due soon.
But there's no guarantee. Homeowners might have to shop around for another lender or seek other financing, such as a credit card, which carries a much higher interest rate.
"Unfortunately, there's no substitute for having liquid savings," McBride said.
Betty Lin-Fisher can be reached at
330-996-3724 or blinfisher@
thebeaconjournal.com.
To see more of the Akron Beacon Journal, or to subscribe to the newspaper, go to http://www.ohio.com. Copyright (c) 2008, The Akron Beacon Journal, Ohio Distributed by McClatchy-Tribune Information Services. For reprints, email tmsreprints@permissionsgroup.com, call 800-374-7985 or 847-635-6550, send a fax to 847-635-6968, or write to The Permissions Group Inc., 1247 Milwaukee Ave., Suite 303, Glenview, IL 60025, USA.
More News:
Market Updates |
Stock Alerts |
All Trading News |
Stock Index
|
|
