Bye Bye HELOC

Interesting article from MSNBC about Home equity loans drying up for some. The main story in the article focuses on a woman from Cali who had a $100,000 HELOC with Countrywide. She was up on her bills, has a good credit score and still has significant equity in the home, but the line of credit was shut down anyways. With the numbers given in the article even with the house depreciating she still has approx. 45% equity in her home so of course she is dismayed and confused as to why her line was stopped. The worst part of the story is she paid over $2000 in fees about 2 years ago to open the line and never used more than $14,000. Countrywide said she could hire her own appraiser and fight it. Of course she is in RE and only receives commission, she was planning to use her HELOC as a cushion for slow months.

Too bad she does not read Housing Panic then should would have expected this. The warning are there but HP says it outright -

IF YOU HAVE MONEY AT COUNTRYWIDE BANK, INDYMAC BANK, E*TRADE BANK, WASHINGTON MUTUAL OR ANY OF THE OTHER GARBAGE LENDERS, GET IT OUT NOW AND GET IT OUT FAST.

Let's go back to the MSNBC article. First why are HELOCs being used, most people are not using them for emergencies, they are using them to subsidize a lifestyle that is not affordable to them -

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.

The banks were giving away money at low rates so people could just throw it away. And the way the banks/lenders did it makes absolutely no business sense -

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.

So banks were loaning out up to 120% of the value on a house. Banks were taking huge risks, giving 20% over the value. On a million dollar home this is $200,000 not a bad amount of extra cash in ones pocket, especially when one took 100% financing and included the closing costs in their mortgage. Remember most banks figured foreclosures would be low since people wanted to keep their homes - but these patterns came from when people actually had to put money down to get a house, not when people were given basically free money for buying a house. And for all those 120% financed people who decide to walk away - and there will be many - it really is free money. Also, if one figures in the attorney's fees and the realtors commission when a loan goes bad it probably is at least another 10% of the homes value in expenses the banks/lenders have to eat. So banks could lose an extra 30% about of a houses peak price. In some areas that have already had double digit declines banks/lenders are losing up to 50% of the peak purchase price. How long can one stay in business doing that? Well I guess if the Fed (really taxpayers) are subsidizing this behavior they can stay in business a long, long time.

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.

Actually, this is good for everyone and the way it should be.