Squeeze: Countrywide freezes Vegas HELOCs

News item from Bloomberg News: "Countrywide Financial Corp. has suspended the home equity credit lines of almost all its Las Vegas customers..."

More: "Since January, Countrywide, Bank of America Corp., Washington Mutual Inc. and IndyMac Bancorp Inc. have frozen about 600,000 equity credit lines nationwide, said Michael Kratzer, president of a Bankrate Inc.-owned website that's fielding consumer complaints. The lenders are targeting borrowers in cities where property values are falling, including Las Vegas, Chicago and Los Angeles, he said."

Coupla thoughts: I receive a couple of e-mails a week -- usually from WaMu borrowers -- who complain that their HELOC has been unfairly, or unwisely, frozen because of declining home prices. Sorry to say, but from the perspective of the lender, these freezes make good sense. Home prices are falling rapidly; it doesn't make sense to loan against a declining asset. That kind of lending in this environment would be, to use a technical banking term, stupid.

This is particularly true in the case of Countrywide: the time to stop making dumb loans is now. A note to the readers who know for a fact that your case is the exception to the rule, that you have equity to borrow against and you're a good credit risk: It doesn't matter. If Countrywide lends to a thousand people like you and four of those loans go bad, that is four too many.

Also: This is what the Fed is up against. Credit is tightening, regardless of how steeply the Fed cuts interest rates, and how many billions of dollars it shoves into the pockets of banks, investment banks, convenience stores and car dealers. (OK, I made that part up. The Fed isn't giving loans to convenience stores and car dealers. Yet.)

Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com
Photo Credit: AFP/Getty Images

Comments

[MyLessThanPrimeBeef]

Why do they need HELOCs? These people just need to get their babies' used diapers together, securitize them, mosey on over to Tin Cup Alley and swap their smelly diapers for US Treasuries. Oh, they have to register themselves as an investment bank first though, which should not be that hard if the qualification is that you have to be a moron, sorry, genius.

[G Spot1]

Peter,

Regarding the people that email you complaining about HELOC freezes, do you have a sense of what these people are using their HELOC for? I suppose if they have the cash to service the new debt they want to take out, all the better for them. But in this environment, I have a sinking feeling that many of these people need to keep tapping the equity to make their mortgage payments, including on the HELOC itself.

[MB]

wait a minute...so I entered a contract for a loan/house that is now worth 100k less...but i'm still responsible for my obligation...

...but countrywide can open a line of credit, and when the asset value drops..they can just call it off?

well....do they get the equivalent of a 'prepayment' penalty?

[Enlightenment]

Don't Buy Things You Can't Afford!
http://www.jibjab.com/view/143626

The banks should have started doing this 2 years ago.

[Cal]

Considering how poor CFC underwriting was, how poorly HELOCs are performing and how risky being in a junior position is in a declining market you wonder why it took them so long. The other part of the equation is liqudity, they are running low on cash so extending risky credit is not in the cards for these players.

I also wonder if their regulators said something.. all it would take is a regulator commenting that this might be unsafe and it gives them legal cover to pull any additional HELOC draws they want (its parts of the HELOC agreement).

[Martin]

You're absolutely right, Peter. Freezing HELOCs or equity lines is the obly logical step banks should take at this time.

I do know BofA is still soliciting equity lines. So is WAMU. A WAMU branch manager -- my next door neighbor -- told me only those with at least 70% loan to value (new line inlcuded) and 720-plus credit scores are being considered.

[Tu Phung]

Thinking of all the bank gurus genuis that came out of a marketing university. Making loans with nothing down, hoping to make the bottom line. It is like giving me a $100,000 car to drive for a few years with nothing down, and I return it, because I don't have the money. Love the United States for market test.

[arroyogrande]

" i'm still responsible for my obligation...but countrywide can open a line of credit...and...they can just call it off?"

I really don't see how these are even remotely equivalent. In one case, you borrowed money, and are expected to pay it back. In the other case, Countrywide is just refusing to let you borrow any more money.

How are they the same again?

Are you saying that because you are expected to pay back money you borrowed, Countrywide should be expected to loan you still more money?

What?

- arroyogrande

[ET]

MB,
You're missing the point. You agreed to borrow the amount that you did. If the underlying asset were stocks instead of a house, you would currently be facing a margin call. Maybe THAT is what should happen.

The lender has the right to extend credit based on currently valid circumstances, and cancel that offer of funds when those circumstances change, namely the value used to secure the credit.

[are they crazy]

Why is it so hard for people to understand that equity is only yours after you have sold and are paid your profit - that is your equity - everything else is a guess. And, tapping an equity line means taking a loan that you have to repay regardless of the eventual sales price of your house. And what is the deal of wanting lenders to lower loan amounts to match the decreasing value of the house - if it were rising, would they want their loans to go up?

[Susan Hilton]

Too bad the home line of credit didn't stop before the slide rather than after.

[Digitalian]

HELOCs in most cases are nothing more than a tool for financial morons who simply can not get by without the latest material goods that they "need" to impress their equally materialistic and vapid friends and neighbors. I say good riddance.

[Michigan Dweller]

I live in Ann Arbor, have good credit, a 15-year fixed, and a HELOC with National City. AA is a bright spot in the economically troubled SE Michigan region, but it's not immune to recent housing declines. (Nothing like Detroit, of course.)

NC just decided that our house was worth $323k, which (I think) is very conservative, but not unreasonable if you only count bedrooms, bathrooms, and square feet. (Given the recent remodeling, we're definitely in the upper end of similar houses in our neighborhood, but I'm guessing NC doesn't really care.) We owe 300k on our fixed-rate and 3k on our HELOC. However, the total LOC is $80k, which we've counting on as a safety net in case of job loss, while we rebuild our savings after our recent remodel. What was interesting to me is that NC didn't cut the LOC to $23k, but just froze it altogether. They do allow for appeals if you are mid-remodel or if you pay for a new appraisal yourself.

[Michigan Dweller]

Digitalian wrote:

"HELOCs in most cases are nothing more than a tool for financial morons who simply can not get by without the latest material goods that they "need" to impress their equally materialistic and vapid friends and neighbors. I say good riddance."

While I agree this may be true in many cases, HELOCS also serve as a relatively cheap insurance policy in case of job loss if you are building or rebuilding savings and live in a market with stable or appreciating house values. I believe most financial analysts suggest having a 6-month cushion in case of job loss. If you don't have that, and you lose your job, you can't really get a HELOC after the fact, so it's good to have one ready in advance. Your other option is likely to be to tap into your 401k, but that has penalties of its own.

[Ann]

"NC just decided that our house was worth $323k, which (I think) is very conservative, but not unreasonable if you only count bedrooms, bathrooms, and square feet. (Given the recent remodeling, we're definitely in the upper end of similar houses in our neighborhood, but I'm guessing NC doesn't really care.) "

Posted by: Michigan Dweller

Sigh .....those basics are EXACTLY the items that were determinative on an appraisal under traditional standards.

How much sq footgage

How many bedrooms (and they must have a closet)

How many baths

That was pretty much it. You might get a couple thousand (and I do mean under $5000) for having a fireplace or maybe a grand or so for having a fenced yard and the garage was only worth about $20 or so per sq ft - and a 2 1/2 car garage didn't get as much for sq footgage of the extra '1/2' as it did for the sq fottage that would accomodate a car.

None of your 'remodeling' if it is was only redecorating (counters, floor coverings etc) or maintence (upgrading electric service, new windows etc) really count for squat. All those go to is 'condition' which was ranked as poor, fair, good or excellent and would swing the price by sq ft only $5-20 depending upon the area.

Get over it. A buyer may HATE those granite counter tops, the tile you picked for the bath and the stainless steel appliances. (I would - I would insist that you pay to remove the grantie counters/stainless steel appliances that have all the warmth and charm of a chemistry lab and that you drop the price to adjust for the lack of counters and appliances.) Landscaping is exterior decorating and might add the cost of the plants (but not labor) to the house. That is DECORATING.

You have to do maintence - it does not add value although it can make the house lose value (leaky roofs are not a good thing.) So that new roof, that new furnace, that new septic tank and all those similar things ddo NOT add value.

The only remodeling that truly counts in an apprisal (historically as in pre-bubble) was one that added square footage or took unused space and added a room such as a bath or bedroom or family room.

[Michigan Dweller]

Ann, no arguments with your comment. I think we're in agreement.

As it happens, our remodel did add new master bath to a relatively unused space, significantly increased the number of kitchen cabinets, added a master closet in unused space, and added a pantry in poorly used space. So, I think it historically would have been considered an value add. While we did add cherry cabinets, stainless steel appliances, and a quartz countertop, they were for us, not under the illusion that they added significant value to the home.

I think I came across as saying that maintainance and decorating (using your definitions) should have added value. I wasn't trying to say that. I was simply saying that we have an above-average home that NC is valuing below what average comparable homes are currently selling for, using only sq ft., bedrooms, bathrooms, and acreage as the metric. (We effectively live in a 100 year old subdivision with many identical houses, so comparable are easy.) This led me to call their valuation conservative, but reasonable. I have no real issue with them setting the value as they did.

The point of my previous comment, made more plainly, was:

a) National City is doing it too. (Not mentioned in original article.)
b) Even though is there is room for a HELOC under their conservative, recent evaluation and we're a good credit risk, they still have no interest in continuing a HELOC with us. This is interesting to me as a real sign of credit market collapse.

[Cal]

Michigan Dweller: "Even though is there is room for a HELOC under their conservative, recent evaluation and we're a good credit risk, they still have no interest in continuing a HELOC with us. This is interesting to me as a real sign of credit market collapse."

Well you're at 93% LTV now and old school conservative HELOCs were 65-70% LTV. Also in their view your house drop 57k in value. Just another reason to be more conservative.

Its a return to rational lending, this isnt a credit crunch. There is still plenty of credit available.

[E.S.]

"While I agree this may be true in many cases, HELOCS also serve as a relatively cheap insurance policy in case of job loss if you are building or rebuilding savings and live in a market with stable or appreciating house values. I believe most financial analysts suggest having a 6-month cushion in case of job loss. If you don't have that, and you lose your job, you can't really get a HELOC after the fact, so it's good to have one ready in advance. Your other option is likely to be to tap into your 401k, but that has penalties of its own"

Cheap insurance policy? Some folks just dont get it, period! This is exactly why HELOCs should not exist.

[B]

I live in the greater LA area and my HELOC from Indymac was frozen a couple months ago. It was clear that they were in panic mode, since even with recent market declines, I still have substantial equity in the house. I was upset because my HELOC is part of my financial plan and mitigates the risk of job loss or other large financial upset.

About one month after receiving the original freeze notice, I received another notice that stated they had frozen my HELOC in error and that they were reinstating it.

[Stan S]

Maybe HELOC'S should not exist, but they do. Our combined debt is less than a third of the current value of our home. WE owe 4k on a 168k line and Countrywide froze it--not reduced it. Luckily, we are retired and don't really need to use it. We decided that it would be cheaper than selling our investments and paying the tax on the gains. Our credit score is over 800. We have offered to pay it off if they will waive the $350 termination fee. Ironically, they continue to make refinance offers to us to take cash out of over 100% of our 1st mortgage which they also hold. Sorry, but their freeze makes no sense to me in our situation. Never again with Countrywide.