Trying to tap into home equity? We'll see . . .
Countrywide and others tell thousands of homeowners that they can no longer borrow against their credit lines as the companies tighten standards.
Los Angeles Times -- Kathy M. Kristof and E. Scott Reckard -- January 31, 2008
latimes.com
Tens of thousands of homeowners with home equity lines of credit are getting a rude surprise: They've been told by their lender that they can no longer take money out on their credit lines because sinking home prices have put them "upside down" on their mortgages.
Countrywide Financial Corp. sent letters to 122,000 customers last week telling them they could no longer borrow against their credit lines because the total debt on the home exceeded the market value of the property. The lender says it is using computer modeling to determine which of its customers would have their cash spigot shut off.
The move by Countrywide, the nation's largest mortgage company, is part of a pullback by lenders nationwide on home equity loans, which are often used to finance home improvements and consumer spending. Such loans, also known as second mortgages, were widely available until six months ago, when delinquencies and foreclosures began to soar. Now, with new evidence of sinking home values, many lenders are requiring that homeowners maintain a much larger percentage of equity in their homes as a cushion against financial problems.
The tightening of credit could help limit the effectiveness of interest-rate cuts by the Federal Reserve and an effort by Congress and the White House to put more money in the hands of Americans via tax rebates and other economic measures.
"The Fed is pushing on a string," said Peter Morici, an economist at the University of Maryland. "Unless you can significantly expand the ability of banks to provide credit, the Fed's efforts are not going to do much to ameliorate a slowdown."
Among the lenders tightening as the Fed loosens, Chase Home Lending, which has been slowly raising credit standards since last summer, will start imposing new guidelines Monday that further restrict who will be granted a home equity line, the company said. This week, California homeowners can tap as much as 90% of the equity in their homes. Starting Monday, however, Chase won't let homeowners in certain parts of the state -- including Los Angeles, Orange and Imperial counties -- borrow more than 70% of the value of their homes.
"Our goal is to always make sure that for both our sake and our customer's sake that our customers don't owe more than their equity," said Thomas Kelly, a spokesman for Chase, a unit of banking giant JP Morgan Chase & Co.
At the same time, Fannie Mae, the giant government-sponsored mortgage investor, this month told lenders that sell it mortgages that they couldn't loan as much money to homeowners in areas that have had significant price declines, including much of Southern California. The company reduced its maximum "loan to value" ratio in those areas by five percentage points.
One result of Fannie Mae's change: On a highly promoted Bank of America loan that charges no upfront fees to borrowers, the maximum loan amount is now 90% of a home's value, down from 95%, bank spokesman Terry Francisco said. And on a program that gives mortgages to firefighters and police, the limit has been reduced to 95% from 100%.
Bank of America is the largest direct-to-consumer mortgage lender and Countrywide the largest home lender of all because it makes so many loans through independent mortgage brokers.
But tumbling home prices have forced small lenders to change their policies as well. Cityside Federal Credit Union in downtown Los Angeles, which has 6,482 members and $53 million in assets, has reduced its maximum percentage of home value to 90% from 100% and is turning down many requests from members who had hoped to refinance loans at today's low rates.
"A lot of people are in that situation right now because they just kept refinancing and took out all the equity in their homes," said Teresa Becerra, a senior real estate loan officer at Cityside.
"They'll have a couple of mortgages they want to combine now. But we can do a computer appraisal right away, and what they're finding out is that the value just isn't there."
Cityside has had to cut off some home equity lines of credit as well as turn down borrowers seeking new loans because of the change, Becerra said. So far, it has only cut off credit when customers bring up issues that cause the credit union to examine their circumstances.
"If they had home equity, and now they're upside down and it's brought to our attention, we'll definitely cut them off," she said. "But we're not doing a computer-generated study to find all those situations or anything like that."
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