Redlining HELOCs

Are lenders redlining HELOCs? That is a question Washington lawmakers are asking today. First, what is redlining?

It is a discriminatory practice, involving lenders which refuse to lend money or extend credit to borrowers in certain "struggling" areas of town.

An article from CNN Money titled US Lawmaker Questions Lenders on Frozen Home Equity Loans explores the issue that people in certain areas are having their HELOCs shut down independent of equity levels and credit scores. Just targeting a neighborhoods, zip codes or other geographic regions is against the law. Here is a snippet from the article

Rep. Dennis Kucinich, D-Ohio, who chairs the Domestic Policy subcommittee, sent letters to nine lenders Thursday asking why they have suspended home-equity lending in certain areas of Ohio that have been hard hit by the downturn in the housing market.

"People have had their home equity lines suspended whether their credit is good or not, and whether they have sufficient equity in their houses or not," Kucinich said in a statement.

The letter sent to lenders asks what criteria are being used to determine which borrowers are having their home-equity loans suspended, and requests information on how lenders are assessing the value of the homes for borrowers receiving suspension notices. Kucinich also asks what other loan products the lenders have suspended, or are considering suspending.

There probably are people who own 100% of their property and are having their lines closed. It is more likely that there is some models showing worse case scenarios for falling housing prices and these being used to close lines. With current projections of a 10% house price drop across the nation, with projections of another 40% in targeted localities, these calculations will affect HELOCs.

There is a great post yesterday at Calculated Risk regarding a bankruptcy ruling against stated income HELOC lines. Here is an important section:

[T]he Court found that the Hills knowingly made false representations to the lender, the lender's claim that it "reasonably relied" on these representations doesn't hold water, because "stated income guidelines" are not reasonable things to rely on. In essence, the Court found, such lending guidelines boil down to what the regulators call "collateral dependent" loans, where the lender is relying on nothing, at the end of the day, except the value of the collateral, not the borrower's ability or willingness to repay. If you make a "liar loan," the Judge is saying here, then you cannot claim you were harmed by relying on lies. And if you rely on an inflated appraisal, that's your lookout, not the borrower's.

In summary, many HELOCs were given ONLY on the appraised value of the property. Not the borrowers credit score or the ability to pay.

With the falling property values and more stringent lending practices HELOCs will become less common and harder to qualify for. Opening a HELOC was like obtaining a new credit card - very easy. Getting and holding a HELOC will be more and more difficult, but lenders will also have to explain and justify the new practices. These can not just be done because your neighborhood's values are falling - it must be done on an individual by individual basis. That means alot more work for when closing lines.