Lenders cut off the home-equity tap
Thousands of homeowners are getting notices that their lines of credit have been frozen, and it's harder to get new second mortgages. Here's what your bank is doing and whether you're at risk.
For more than a decade, banks encouraged homeowners to tap their equity for everything from paying off credit cards to covering college tuition.
Now lenders are abruptly shutting off the spigot.
More than 100,000 homeowners at one lender already have been told that their home-equity lines of credit have been frozen and that they can't use them to borrow more money. Others have seen their credit limits abruptly lowered.
Meanwhile, lenders are tightening standards so that getting a home-equity loan in many markets is more difficult, even when the value of your home is still well above what you owe on it.
Loan experts predict many more homeowners will find themselves cut off from home-equity loans and lines of credit as lenders flee the so-called second-mortgage market.
"I don't think the worst is over," said mortgage expert Dick Lepre. "I think there are going to be more (lenders) who will stop originating second mortgages and more who will be sending people notices that they're no longer able to draw on their existing lines of credit."
A grim reminder about risk
Home-equity loans and lines of credit are known as second mortgages because they are loans made after a primary mortgage has been granted. If a homeowner defaults, the proceeds of the home's sale go first to the lender that holds the primary mortgage. The second-mortgage holder gets whatever is left over, if anything.
Declining home values and spiking default rates in recent months have reminded once-enthusiastic second-mortgage lenders of the risks of these loans. The biggest home lenders are scrutinizing how much their borrowers owe in relation to those declining values, as well as examining any deterioration in their customers' credit scores or payment habits.
Here's what they're doing:
the United States' largest home-equity lender, notified 122,000 homeowners in January that their home-equity lines had been frozen because their homes had lost "significant" value. Countrywide lost billions because of spiking defaults in mortgages made to people with troubled credit and recently said it was experiencing higher delinquencies in its portfolio of prime home-equity loans, made to people with good credit. Countrywide is in the process of being acquired by Bank of America.
has stepped up "case-by-case reviews" of home-equity accounts and has "seen an increase in the number of borrowers affected," although spokeswoman Mary Trigg declined to say how many customers' home-equity lines have been frozen. She said the reviews "may include a variety of factors such as credit scores, debt levels, payment history, property-value changes and others."
is reviewing customer accounts but so far has not shut down large numbers of credit lines, spokesman Tom Kelly said. It has, however, reduced the percentage of home values that borrowers can tap with new home-equity lines of credit. Previously, homeowners in some cases could get a line of credit on top of their mortgage that equaled 95% of their home's value; today, the percentage is usually capped at 85% and may be as low as 65% in some rapidly declining markets, such as in Nevada.
Bank of America
is "reviewing all home-equity lines of credit to ensure our credit exposure is commensurate with current market conditions and to assess the value of the collateral securing our home-equity lines of credit," spokesman Terry Francisco said. "In areas of the nation where home values have declined consistently, Bank of America has begun contacting customers to inform them about changes in their ability to access existing lines of credit due to the decline in property values."
, another large home-equity lender, did not return calls for comment but is believed to be conducting similar reviews.
Cut off and in a tight spot
The notices have been coming at a bad time for some borrowers. One woman received a notice from Countrywide shortly before she planned to tap her line of credit for an international adoption. Others were in the middle of remodeling projects or planning to use the money to pay children's college tuition bills in the fall.
Sandy V. of Las Vegas used her home equity to buy other properties in Nevada, and now all her real estate is losing value. She got a letter a week ago from Bank of America saying that her nearly tapped-out $130,000 line of credit had been frozen. She estimated that between the line of credit and her $200,000 mortgage, she owes $30,000 more than her house is now worth.
Before receiving the letter, Sandy had paid down the credit-line balance by $5,000. "Now I wish I had that money back," she said.
Many borrowers with frozen lines of credit have few options because, like Sandy, they now owe more on their homes than the homes are worth. They typically can't refinance into other loans.
But not everyone affected is trapped.
How flexible are you?
Sarah Ordonez of Whittier, Calif., said she had received a notice from Countrywide in November, well before the mass mailing. The lender said it was freezing her line of credit, which had a $24,000 balance, after she was 10 days late making a payment. The payment wasn't late enough to show up on her credit report or affect her credit scores, but it was enough to trigger the freeze.
"They said if I made my payments on time for six months, they'd reinstate" the ability to tap the line, Ordonez said.
Unlike some other borrowers, though, Ordonez still has plenty of equity left in the home she bought five years ago. She owes about $265,000 on her first mortgage, and homes in her area are still valued at $400,000 to $500,000. So she's planning to refinance both loans into a single, larger mortgage.
Ordonez is in a good position precisely because she didn't drain every dime of equity from her house as its value rose during the boom. I've never been a fan of using your home as a piggy bank, and I believe it's always smart to leave at least 20% of its value untapped.
If you haven't been so cautious, however, consider taking the following steps:
Try to estimate the current value of your home as well the general trend for home prices in your area. Zillow.com is one place to check, although it's far from a foolproof resource; a chat with an experienced local real-estate agent can help fine-tune your figures. Sharply falling home prices may put you more at risk of home-equity-line freezes.
Total what you owe. If the combination of your primary mortgage and your home-equity borrowing exceeds your home's value -- or comes within 10% or so -- consider yourself at high risk of having your line of credit frozen. If home values are falling fast in your area or your credit scores have declined, you might be at risk even if you have a pad of equity in your home.
Consider your next steps carefully. You shouldn't borrow just to borrow; you'll have to pay interest on any money you tap. But if you had planned to pull out equity for a legitimate purpose -- fall tuition bills, for example, or to complete an in-progress remodel -- you might want to do it sooner rather than later, as long as you can make the payments.
If your line is in danger of being frozen, you also may want to hold off on paying down its balance unless you're planning to sell your home soon. That may seem counterintuitive, but if your line is frozen, you won't be able to tap any of the credit you free up with extra payments. You may be better off paying down credit card debt or putting the money into savings instead.
Lenders cut off the home-equity tap - MSN Money