Lenders cut off the home-equity tap

By Liz Pulliam Weston

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:

Countrywide, 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.

Wells Fargo 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."

Chase 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."

Washington Mutual, another large home-equity lender, did not return calls for comment but is believed to be conducting similar reviews.

Continued: Cut off and in a tight spot

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