The Housing Chronicles Blog: Some home equity lines drying up

Tuesday, January 15, 2008

Some home equity lines drying up

From Wednesday's Wall Street Journal, not only are some lenders no longer chasing after delinquent homeowners late on home equity lines, but to protect themselves are increasingly lowering limits based on declining home values, lower credit scores or both

"More often now than ever before we are writing off the loan" when borrowers fall behind on home-equity payments, says Bob Caruso, Bank of America Corp.'s national servicing executive. "The customer still owes the money, but it is no longer an asset on our books." That doesn't let the borrower off the hook: The lender keeps the lien in place, however, in the hopes that it will receive some money when the property is sold.

This approach can make it less likely that borrowers will lose their homes if they can't make their second-mortgage payments. But it can also complicate efforts to work out a resolution to the borrower's loan problems -- and the borrower may still have to contend with the loan down the road, such as when he refinances or sells the property, for example.

In fact, by forcing the borrower into foreclosure, the lender can be working against its own interest:

When companies write off these loans, it reflects the grim economic realities facing lenders and investors who own home-equity loans. To foreclose, the holder of the home-equity loan must buy out the owner of the first mortgage. But when home prices fall, the property's value often isn't enough to cover the first mortgage, any past-due interest or fees, and the costs associated with foreclosure. That means in situations where there is a first mortgage, the holder of the home-equity loan can actually wind up deeper in the red by foreclosing.

Consequently, many lenders are now looking ahead to avoid future losses:

In addition to walking away from delinquent loans, some banks are hoping to stave off future problems by reducing the amount of credit available to certain borrowers with lines of credit. Washington Mutual Inc. late last month notified about 3,200 of its customers with home-equity lines of credit that it was reducing the maximum amount they could borrow. The borrowers "have experienced an adverse change in their financial situation, as evidenced by a substantial credit-score reduction," a company memo said...

Citigroup Inc.'s Citibank unit says that under the borrower's credit agreement, it is permitted to freeze home-equity advances or reduce credit limits if the home's value has declined below the original appraisal, or if it reasonably believes the borrower won't be able to make the required payment. Such adjustments are increasing in the current market environment, a company spokesman says. David Stevens, who runs the mortgage operation at Long & Foster Real Estate, based in Fairfax, Va., says he's received several calls from borrowers whose home-equity lines have been reduced because of falling property values. "It's a very prudent move, given the circumstances in the market today."

Especially on the heels of a $15 billion write-down.

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