Home equity loans drying up for some

Like many homeowners during the housing boom, Lynnette Madden and her husband decided to open a home equity line of credit about a year and a half ago as “padding” for emergency expenses and a cushion for Madden’s commission-based real estate career. The couple, who live in Bakersfield, Calif., never paid the bill late and never drew more than $14,000 in debt from the line’s $100,000 credit limit.

That’s why Madden was surprised when Countrywide sent her a letter in late January stating that the couple's home equity line was “suspended” and they could no longer use it. The reason? Their home, the letter stated, had declined in value and thus the couple no longer had the amount of equity they did when they opened the line.

“I went ballistic,” Madden says. “I could understand it if we missed a payment or maxed it out, but we’ve been responsible.”

Madden is learning that even with a high credit score, substantial  home equity and a history of using debt carefully, the rocky real estate market is punishing even responsible consumers. Madden disputes the lender’s claim that her shrunken home value disqualifies her for the line: She says the home was worth over $500,000 two years ago, is still worth over $400,000 and that the mortgage balance is below $220,000.

Given the current credit crunch and real estate downturn, Madden doubts she can persuade the company to reinstate the home equity line. She says a Countrywide rep told her that if she paid for a new appraisal (at a cost of more than $400) she could try and use it to appeal the lender’s justification for the closure. But Madden says she has no intention of paying for a new appraisal just two years after she paid over $2,000 in non-refundable fees to open the line.

Fact file: Home equity loans Many lenders say you need a credit score of 680 or higher to get home equity loan these days. But that’s not all: Your home’s value and market dynamics also play a role. Estimate your home value. Lenders use multiple methods to gauge home value for the purposes of offering a home equity loan. Consumers can use Zillow.com or RealEstateABC.com to estimate home value, but that value may not match a lender’s since lenders can use one of more than a dozen valuation models or hire appraisers who may differ in their judgments. Estimate debt on the home. Once you have a ballpark home value, look at the combined amount you owe on your mortgage plus the limit of your home equity line of creidt (even if you haven’t borrowed the limit). If you owe (or could owe) 90 percent or more of the home’s current value, a lender may grow nervous about your home equity line. Determine whether it’s worth fighting to keep your line of credit open. If you’ve learned your home equity credit line was suspended, paying fees for an appraisal and appealing the lender's decision can be costly and time-consuming, but depending on your situation it may be worth it. If you have good credit and can secure a low-interest credit card or use no-interest financing for major purchases, those options might be better.

A home equity line of credit, or HELOC in industry-speak, is a revolving credit line with a limit proportionate to the homeowner’s equity in their property. Home equity lines offer much lower interest rates than regular credit cards do because they are issued against a “secured asset” — a home.

As property values soared across the country in recent years, such home equity lines of credit helped consumers finance everything from home remodels to vacations and nights on the town. But as home values have dropped, consumers have seen their equity shrink or even disappear, which in some cases means the lender no longer has any security for the home equity loan.

For example: A consumer who put 10 percent down to buy a $500,000 home would owe $450,000 on his or her mortgage. Under old standards, he might have been able to get a $50,000 home equity line of credit a year or two later when his home appraised at $550,000. Under that scenario he would owe up to $500,000 on the home but still would have at least 10 percent equity in the property.

But if the value of the home sank bank to $500,000, he would be left with no equity and might lose access to the credit line.

Madden and her husband have plenty of company: Countrywide confirmed in an e-mail that to date 122,000 customers have been notified by letter that their home equity lines of credit have been impacted by falling home values. The company stated that according to credit lending regulations, “a creditor may prohibit additional extensions of credit during any period in which the value of the dwelling that secures the plan declines significantly below the dwelling’s appraised value for the purposes of the plan.”

Other lenders including Wells Fargo, Bank of America and Chase confirmed that they are following suit, reviewing existing credit lines, lowering their limits, or suspending them altogether — if not on the scale of Countrywide.

Lenders periodically conduct “portfolio reviews” to examine whether the assets (in this case homes) against which they have extended credit have held their value, says Richard Hagar, an appraiser at American Home Appraisals in Mercer Island, Wash., who teaches courses on mortgage fraud.

In recent years, Hagar says lenders would loan up to 120 percent of a home’s value (up to 100 percent for a primary mortgage plus 20 percent for a home equity line). But now lenders have returned to their prior conservative metrics. This means they’ve capped lending for 90 percent of the home’s value, including the primary mortgage and home equity line. And they're doing it at a time when many markets’ home values are declining.

“This is the pendulum swing back to the safe side,” he says. “There’s not much a consumer can do.”

For a homeowner like Madden, that’s cold comfort.

“They’re putting everyone in the same fishbowl,” she says. “How many people would pay another $400 or $500 to pay for a new appraisal in today’s market?”

Madden’s arguments aside, lenders say the suspensions are good for the consumer.

“We don’t want the customer to owe more on the house than it’s worth,” says Thomas Kelly, a spokesman for Chase Home Lending.

Terry Francisco, a Bank of America spokesman, says that the bank will reinstate suspended equity lines if a home’s sunken value revives. But it’s hard to predict when that will happen.

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