$6 billion in cuts in WAMU HELOCs

I've posted several times about lenders -- notably Washington Mutual -- freezing or reducing HELOCs, or home equity lines of credit. This article indicates that letters are going out right now to notify more borrowers that their lines of credit have been suspended or slashed: "Washington Mutual has slashed or suspended $6 billion in available home equity credit to its customers in an effort to reduce its risk in a flailing housing market."

More: "If they haven't already been notified, WaMu's customers across the country will learn of the change to their credit availability in a letter mailed to them in the next several days. The bank declined to disclose how many customers will be affected."

Analysis: This is why the Federal Reserve's job is difficult right now. On the one hand it is cutting interest rates to make borrowing more attractive. On the other hand it is strongly encouraging banks and lender to improve their balance sheets, which in many cases means: stop making the kind of loans you've been making lately.

There is also a fairness angle here: is it fair for banks to unilaterally reduce credit to even their best borrowers? I would point out, whether it's fair or not, it's not new; banks have always done this. Mark Twain: "A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain."

It's raining, folks. Cats and dogs and housing prices are falling from the sky. The banks want their umbrellas back.

Your thoughts? Insights? E-mail story tips to peter.viles@latimes.com.
Hat tip: Miami Meltdown

Comments

[arroyogrande]

"is it fair for banks to unilaterally reduce credit to even their best borrowers"

It's the banks' money...I don't see why they should *have* to loan it out when the risks for default have intensified (assuming they are abiding by the terms of the HELOC contract). Some people I know still have intact $300,000 lines of credit...but, of course, they don't owe very much on their houses, and so have a big "equity" cushion, which keeps the banks 'happy'.

In other words, if you have enough collateral to back the loan, the banks are still willing to lend you money.

If you don't have enough collateral (as defined by the banks), even a high credit score may not be good enough.

- arroyogrande

[Cal]

Once available credit wasn't able to grow anymore it really pricked the credit bubble. Subprime went first and people were thinking that the issue was confined to poor people with low FICO, then Alt-A and now HELOC. You see the deterioration from the bottom up. For home purchases they are trying to draw a line in the sand with Fannie/Freddie & FHA hoping that they are large enough to absorb the blow.

The credit card companies are now clamping down (raising interest rates, reducing credit limits) as they are seeing a spike in usage as other forms of credit become unavailable. Once that happens on a bit larger scale I think we will get a better sense of just how widespread this thing is. Emergency 401k withdrawls are jumping as well. We are now paying for negative savings rates and irresponsible extension of credit. The Fed is making the dollar so weak in the hope to boost business and keep people working but it is a desperate move.

[FINLwhiz]

I like the Twain quote, that's a good one!

[Mike S]

Rescinding loan offers that never should of been made in the first place is a good thing.

The real question is why so long to act??? They should of done this in 2005 when they saw/knew things were going haywire.

I recall getting a HELOC 15 years ago when banks actually cared if you paid it back. These HELOC's are still 'easy credit' by 1990's standards. Oh, make that 1980's, 1970's, 1960's... standards as well.

[ajax3456]

It looks like the banks are reducing the values of homes down to 1996 prices ???

They see that coming very soon in the real world and are thinking ahead of the panic

am I right ???

[mbob]

Sadly, Ajax, I think you are.

Is it necessary? Yes.

Will it hurt? Yes.

Will the innocent suffer. Yes

Will the guilty escape. Probably

[Dave P]

I know we all like to bash the banks and the borrowers here but let's put this in the right frame. This is what responsible banks are SUPPOSED to do. It doesn't matter what the creditworthiness of a particular borrower is right now. The fact of the matter is that if they have a HELOC, that is a loan based on collateral. And the collateral is the house.

So....if home prices are declining, and not just a regular decline but dropping so fast that NONE of us could tell you what's fair market, then the banks should freeze those equity lines. Heck, calling the "equity" lines is a misnomer right now. Most people's equity has dried up and disappeared. How can a bank give a secured loan to something that doesn't exist anymore?

[Enlightenment]

The banks should have started cutting back on "ATM Loans" back in 2005. The longer the banks wait, the more money dead-beats will STEAL from them.

[HulaGirl]

OK. In light of HELOC clampdowns, will somebody explain this story? (Tip from Dr. Housing Bubble)

May 18, 2008 - Washington Post

“The gears of the mortgage market are starting to unlock for borrowers needing big loans. In expensive markets such as Washington, that covers most people looking to refinance or move up from an entry-level home.

Just in the past two weeks, interest rates on the new “conforming jumbo” mortgages — for amounts between $417,000 and $729,750 — have come down enough to make a difference to borrowers. And mortgages allowing down payments of just 3 to 5 percent are coming back to the market for borrowers who have good credit.

“The bottom line is rates are lower than they were,” said Kevin Connelly, a vice president at BB&T.

Last week, for example, BB&T was offering 30-year, fixed-rate mortgages for a conforming loan, which is for $417,000 or less, at 6 percent interest with no points, a type of prepaid interest. A conforming jumbo cost only one-quarter of a percentage point more, 6.25 percent. Loans for amounts beyond $729,750, now called “jumbo jumbo” loans, were at 7.25 percent.”

“Other good news for borrowers: Fannie Mae is removing its demand for higher down payments in areas it considers “declining markets,” which includes most of the Washington area. Beginning June 1, Fannie will again accept mortgages with as little as 3 percent down.

Dr Housing Bubble: .."so now Freddie and Fannie are taking a play out of Countrywide; lower down payments and also take lower credit scores."

Huh?!! My kids could beat Freddie and Fannie in a game of Monopoly.

[bigerikwithak]

other news... trying again after a posting a bad link. (sorry!)
Commenter 'kenfield' had this tip in the comments following that San Luis Obispo robber story highlighted in LALand on Thursday;
"Google 'cbs six percent' and click the first link. It's an addendum to a "60 Minutes" story about internet realtors and pressure (they're putting) on the hallowed six percent commission."
It's a Leslie Stahl piece, and worth the time, IMHO.
cheers!

[Nelcisco]

you're right Ajax3456.

What they're realizing is that 2 thing are for sure. The averge middle income household will have to be over 100k to support 500k+ median house in L.A., or prices will have to drop more, or 3, perpetuate what lenders been doing the past 5 yrs. & we know the outcome of that.
What are the chances of average household income 100k+? Alot of people make that, but I mean average.

I read data back about in January on the 10 most unaffordable cities in the U.S. #1 L.A., with house prices more than 10X the household income, San Francisco was @ #3 with houses more than 8X the average household incomes.

[Raul Garcia]

Just another sign of the collapse of the biggest Ponzi scheme in the history of mankind.

[Brad Neal]

ajax3456 no your not right. Maybe 2001 or 2002 values and it really depends upon what area of LA we are talking about. Some areas like Venice, Mar Vista and Westchester are actually holding stready

[tealeaf]

ajax3456 no your not right. Maybe 2001 or 2002 values and it really depends upon what area of LA we are talking about. Some areas like Venice, Mar Vista and Westchester are actually holding stready

Posted by: Brad Neal | May 18, 2008 at 07:38 PM

The areas you mentioned aren't moving property. None of the spendy areas are. I'm seeing stuff for sale in Mar Vista and Santa Monica down to 2004-2005 prices that's just sitting, over 270+ dom.

It's a matter of time - there's no support for the pricing in those areas as incomes aren't there to justify pricing. Credit's not there. Flippers are all but gone. Surrounding areas are cratering, and ARMs / IO / Neg Am is poised to reset. Oh, and job losses continuing to mount.

WHAT WOULD BE HOLDING UP PRICES FOR THE NEXT 12-18 MONTHS IN MAR VISTA, PRAY TELL ?!!

[jb]

LET ME HAVE AN "E"

"There is also a fairness angle here: is it fair for banks to unilaterally reduce credit to even their best borrowers?"

The "E" in HELOC stand for..."Equity". If you have no equity, you have no laon.

[Laker]

ajax3456,
True Prices will get down to 2001 levels and stay there for some time. However, as many here are waiting for the bottom - in which prices will over correct and will get below the mean value. That is prices will be lower than they "should be" based on income and rents. Some of the reasons will be unemployment, lack of good credit, lack of mortgage products, lack of down payment, and lack of desire to purchase a depreciating asset - aka liability.
At the end of the day, prices of houses including in MAR VISTA, Westchester, and san marino will be at their 2001 values.

On the topic, couple of days ago, I received a letter from WAMU notifying me that they are reducing me credit limit on my credit card from $46,000 to $40,156. Why 40,156, i think it is because i have balance transfer money for that sum, which i pay fraction more than minimum payment on it...I have a FICO in the 800's but still it probably seems to them that i pay minimum, so i'm big credit risk to them and they can see me defaulting on it...WHAT A JOKE.
I care less, but still the $44,000 is sitting in the bank right now and earning sweet 6%...albeit for another 8 months...

[Phyllis Harb]

I love the Mark Twain quote!!

[blackbox]

How dare banks not give me a loan based on my fantasy imaginary home value. HOW DARE THEY. Oh wait a minute, that's how we got into this mess in the first place....................

[Gene Foss]

Oh, what a bummer. We have to give-up the Beamer and Benz. Oh darling, how are we gonna pay for those massive granite counter tops in the kitchen remodel. Hey, lets do a jingle mail back to WaMu. Screw'em.....

[Tombstone Realty]

Unfortunately, the banks were handing out imaginary umbrellas - because after all, "it never rains in California"...

[Lynda Davis]

My Husband and I received the sort of notice... Not really a big deal for us, but i did call WaMu to complain. They just hired a consultant who basically used a site like Zillow dot com to estimate the value of our home... no real appraisal, WaMu just figgures the house is worth X... What a bunch of Jerks! I would urg all to pay off your debt with Wa Mu and then cut your ties with those BAS%%$###

It just went to show that they do not care about their customers.

They really lowballed the value of our house too. But here is the kicker. If we did take there value of our home, then subtracted the mortgage, and the 110K Heloc (if we took all that money out) then we would still be 100K in the green... so it just shows how much forethought and how much fear WaMu put into this.

I blame all of the Dumb Ass Neo-Cons who thought a 400K plus home in the sticks (and the Desert), would increase in price to cover a 700K loan.

Idiots

[Laker]

Lynda Davis wrote: "...a consultant who basically used a site like Zillow dot com to estimate the value of our home... They really lowballed the value of our house too. ...If we did take there value of our home, then subtracted the mortgage, and the 110K Heloc then we would still be 100K in the green..."

Wake up Lynda, zillow number is probably 20% MORE than your house can sell TODAY. The direction is only down, so the bank want even some cushion. Why don't you try and sell your house to zillow at their price, or better ask more! Let's see if you can sell.....
Again, Your house is worth 20% less than zillow's number bank adds 10-20% margin so that is why you have NO equity left. NO as in nada, none, ziltch, etc. They are doing the right thing! and what are you doing,,,blaming the neocons....LOL.

[FarFromOver]

Some of your comments seem very pedantic and righteous about the reality of Wamu's recent acts. Until you've experienced it first hand however, you're each simply speculating and gloating how this would never happen to you. It did happen to my family, in the midst of a re-model on a home that INCREASED in value by 75K in the last year alone due to improvements( I found this out after spending money to have an in-depth apprasial of the home done which was suggested by Wamu to re-instate the line.) The line wasn't re-opened - it was denied a second time. The home also has a large amount of equity built into it and rather little is owed on the mortgage. This move by Wamu is due to them simply not having the funds,period. Anyone thinking there is any more rhyme or reason to it than that is fooling themselves.