Several banks issued statements this week saying they were temporarily suspending withdrawals from open home equity lines out of concern that borrowers could owe more than the house is worth.
Historic declines in property values have stripped many local homeowners of their safety nets as lenders freeze lines of credit —- even on people who are current on their mortgage payments.
“It’s an emotional hardship,” said Patti Lien of Menifee. “We kept our credit good. We’ve done everything right, and this is what we get because Countrywide made all these crappy loans.”
Home equity lines of credit are loans that use a home as collateral and allow the borrower to withdraw money up to a maximum credit limit.
Those lines are drying up as Countrywide Financial announced Thursday that it has cut off 122,000 borrowers from pulling any more equity out of their homes. Wells Fargo, Washington Mutual and JPMorgan Chase released statements Friday saying they have also started halting equity lines because of tumbling home values but declined to provide numbers of suspended equity lines.
“It really wreaked havoc for me,” said Dan Holbrook, a Fallbrook homeowner. Working in the real estate industry, he is often paid in lump sums.
At the end of the year, Holbrook paid off his equity line with a $50,000 payment. Four days later, Bank of America froze his equity line, he said.
“I’m scrambling right now,” he said. “It has created a tremendous amount of stress because that was money to live on for me.”
Unlike Holbrook, Lien said she did not rely on her home equity line as a source for daily expenses. But she said the loss of her equity line was nonetheless an upsetting shock because she thought it could cover unexpected medical expenses or other emergencies.
Lien said she has a 30-year fixed mortgage and has never missed a payment.
Holbrook, a real estate consultant, said most people view such loans as emergency-only money. That is how he viewed it until the housing market slowed, he said.
“A lot of people figured these equity lines were safety nets,” he said. “The problem is many of us are on a high-wire act right now. And you think the net is there, and you fall and it’s not.”
Banks freeze the equity line to avoid lending more money than the property is worth because if the house then goes into foreclosure, the lender is unlikely to recoup the value of the loan.
Mortgage brokers said lenders are especially cautious about property values on equity lines because they generally act as second mortgages. When a home goes into foreclosure and sells for less than the loan amount, the lender on a second can get nothing on the loan because the original mortgage must be repaid in full first.
“Home equity line lenders are getting their butts kicked these days,” said Dave Hopkins, a senior loan officer with Rancho Financial Mortgage, a brokerage firm based in Rancho Bernardo. “So (freezing equity lines) is helping them quite a bit in reducing their exposure. It’s not good for the borrower, but on the lender side it makes sense.”
The banks’ reactions follow a 17-month drop in San Diego County home values, according to a Standard and Poor’s report. And many analysts expect them to continue declining.
Riverside County has also seen falling home values, with some areas losing almost half their value, said Phillip A. Bellante, owner of Guardian Mortgage and Realty, a San Diego mortgage broker.
“I can show you areas in Murrieta and Riverside that have gone down 40 percent,” he said. “And is it going to go down more? Yeah, it is.”
JPMorgan Chase has been focusing on homeowners with loans that are close to the value of the home, said Tom Kelly, a spokesman for the lender. He said the lender is primarily concerned with preventing the borrower from owing more than the home is worth.
A statement released by Wells Fargo said that lender has increased the frequency of regular case-by-case reviews of homeowners’ credit rating and property value to determine whether a line of equity should remain open.
When a homeowner signs the contract for a line of equity, lenders usually include language that allows them to close the line in response to changing factors.
Lien said she knew of the language, but thought it only applied to homeowners who encountered credit problems and did not know an external factor such as declining property values could put a stop to the loan.
“It’s a hardship. It’s money that we thought was there and it’s not,” she said. “We didn’t go on a cruise, we didn’t buy new cars but we’re still suffering because of others.”