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Home equity lines of credit yanked
| Tuesday, Feb 19 2008 5:17 PM
Last Updated: Wednesday, Feb 20 2008 12:04 PM
About two weeks ago, real estate agent Lynette Madden was on the phone with a client who had just received a disturbing letter in the mail.
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An unidentified person walks out the door of the Countrywide Home Loan offices, in Omaha, Neb., in this 2007 file photo.
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Countrywide Home Loans was suspending his home equity line of credit, the letter read, because the company believed the value of his property had significantly declined from the date when the loan was made.
Days later, Madden received an identical letter from Countrywide about her own home equity line of credit.
“Now that I’m on the other side of the table, I understand the frustration,” said Madden, who relied on an equity line to bridge the income gaps she sometimes feels in a job fueled by commissions.
Across the country, 122,000 Countrywide customers received similar letters, according to a company statement. It’s unclear how many Bakersfield homeowners may have lost access to their loans, but local mortgage professionals said the suspensions, though legal under the contract borrowers sign, are extremely rare.
Some may find the freeze especially painful because the loans, which extend a set amount of credit to a borrower based on their home’s value in excess of its debt, are a popular way to support small businesses and major expenditures, such as a child’s education or medical bills.
“I don’t ever recall where lenders went out and started calling in their equity lines of credit and started suspending them and things like that,” said Brian Dawson, president of Bakersfield’s American Financial Services, a residential mortgage company. “That’s pretty scary.”
'YOUR HOME'S VALUE HAS DECLINED'
Calabasas-based Countrywide Financial Corp., one of the nation’s largest residential lending firms and the parent company of Countrywide Home Loans, referred a reporter’s inquiry to a brief statement.
“In keeping with its sound risk-management and responsible lending practices, Countrywide is reviewing and analyzing the home equity lines of credit in its servicing portfolio,” the statement reads. “This analysis may result in the company suspending borrowers’ future access to existing lines of credit.”
The letters mailed to Madden and her client offered a bit more detail, including an acknowledgement that borrowers have adequately managed their loans.
“We appreciate that you have handled your home equity account responsibly, and want to make sure you know this change is being made simply because your home’s value has declined,” the letter reads.
That’s little comfort to Madden, who had drawn just $14,500 against her $100,000 line of credit, which she described as a financial “pad.”
“I have to support my mom and dad,” Madden said. “When I use that, it might be to pay their medical bills.”
She’s upset about the approximately $3,000 she paid in fees to originate what has essentially become a $14,500 loan. And she disputes the company’s conclusion that her home is worth less than what she owes. The sizes and prices of homes vary in her neighborhood, she said, and she and her husband have upgraded their property.
Citing privacy concerns, Madden declined to state what they owe on the home, but said, “I am not bottomed out and I am not over-extended.”
'A BIG DEAL'
The popularity of home equity lines of credit ballooned in Kern County in recent years, according to statistics from First American LoanPerformance, a San Francisco-based market research firm. Between 2002 and 2006, the number of home equity lines of credit originated in Kern jumped more than 1,200 percent, according to the firm’s database. The database includes about 50 percent of all home equity lines of credit, according to spokesman Bob Visini.
Easy credit — whether through home equity lines of credit or refinancing — drove many into real estate borrowing, said Rick Roper, executive vice president for secondary marketing at Golden Empire Mortgage, a Bakersfield mortgage banking company.
He’s seen companies suspend home equity lines of credit once before, in the Antelope Valley area during the real estate downturn of the early ’90s.
But the move is apparently uncommon enough to have caught several longtime local mortgage brokers by surprise.
“We were all going, ‘How are they legally able to do that?’” said Beth Cheatwood, the branch manager for Medallion Mortgage. “It’s going to really affect, in a negative way, some clients because they use that line of credit for business.”
The Small Business Development Center at the Weill Institute of Bakersfield College advises against tapping into a home’s equity to start a business, but home equity loans have nevertheless traditionally been the easiest way for small entrepreneurs to get financing, Director Peter DeArmond said.
While he didn’t know of anyone who had been affected by a frozen line, DeArmond was aware of tightening standards for business owners trying to get new home equity lines of credit.
And that may be slowing some local business decisions.
“It’s a big deal,” said Steve Nations, a retail broker with NAI Capital in Bakersfield. “It’s the only way that you can really get cheap money.”
Small businesses take draws from equity lines to fund seasonal inventory needs, or to expand, he said.
And lately, some smaller, mom-and-pop retail tenants have started to delay decision-making, and to postpone planned remodels and building upgrades in the light of tighter lending standards, Nations said.
'UNDER THE RADAR'
Countrywide’s home equity line of credit freeze, and the general tightening of lending standards, are the banks’ way of countering lending products such as no-documentation loans, which were heavily promoted in the past five years, said David Siador, a mortgage broker with Acceptance Capitol, the in-house brokerage for Watson-Touchstone Real Estate.
And customers have little recourse, according to Siador.
“It’s almost an unnoticed, under the radar issue,” Siador said. “If their line gets frozen, who are they going to go tell?”
Madden dialed Countrywide immediately, and is filing an appeal to have her line reinstated.
But she’s skeptical she’ll be able to draw on her credit line again, especially considering the upheaval surrounding Countrywide, which is being acquired by Bank of America.
“I don’t think they’re going to give it back to anybody,” Madden said. “Because they’re in trouble. They’re trying to stop the hemorrhaging.”
So Madden’s new financial pad is a part-time job. In addition to selling homes, she now clocks 15 hours a week doing data entry for a trucking company.