Tuesday, July 8, 2008

More on the HELOC Issues

In a follow-up to yesterday's article about banks arbitrarily closing HELOC lines, There is a great article about the HELOC shutdowns in the Orange County Register. In an article titled Banks Narrow Home Equity Withdrawals the author is able to get some of the lenders on the record regarding closing lines.

As with all the articles we get a few examples. One is of a couple using there HELOC on their first home to pay mortgage payments on their retirement "investment" property. No HELOC for this couple and their investment could end in foreclosure. The second example is someone who was upgrading the landscaping, adding a pool and other backyard features when the HELOC was shut down. After a $100 appraisal the HELOC was reinstated and the appraisal fee was reimbursed. The final example involves a reduced HELOC line that was to be used to help the homeowners daughter purchase a house. However this homeowner decided to just let the reduction stay as is.

Now on the the lender nitty gritty that the article was able to dig up. Lets take a look -

...Homeowners with HELOCs may want to check the fine print of their contract – there's generally a clause that says a bank can slash the line overnight if it finds a good reason. Two most common reasons: the property value has declined or the borrower's credit profile has deteriorated.

The contract works both ways. The lenders have obligations and responsibilities. Someone must have read through their HELOC contract and realize what the lender is not living up to their end of the contract. In stories like the second one profiled in the article could probably have a case - depending on how he allowed the situation to be resolved. One could easily imagine several lawsuits in the works due to the across the board cuts. Now back to the article -

Some experts fear the HELOC reductions could hurt the economy and housing market. They said consumers will spend less if they have less access to credit, which could hurt an economy dependent on consumer spending.

And some experts say consumers who needed their HELOCs to stay afloat financially will now default on their primary home loans, adding to already record foreclosures in Orange County.

The HELOCs are not designed to allow consumers to spend however they want. They are based on equity and in cases were people are using their HELOC to pay their mortgage is not something that should be promoted in any way, shape or form.

Now onto Washington Mutual's response -

Washington Mutual, in an email to the Register, said it reduces home equity lines based on a borrower's payment history, creditworthiness and the value of his or her property.

"Given the current housing market, WaMu, as well as other lenders, have taken the fiscally responsible steps to reduce select credit lines when warranted by declining home values," the company said.

The lender also said it's sticking to terms agreed to by customers.

Wonder if the agreement states the lines could be cut just because?

Washington Mutual, IndyMac Bancorp, and Countrywide Financial – which was just acquired by Bank of America – have led the industry in cutting HELOCs, according to an April 14 report by investment bank Keefe, Bruyette & Woods (KBW).

IndyMac did not respond to questions but previously said it is reacting to falling home prices and credit scores of borrowers and that it's exercising its contractual rights. Countrywide did not immediately respond to questions, but its new owner Bank of America, which also has reduced HELOCs, also said it's responding to falling property values.

Both IndyMac and BofA have said borrowers can appeal a reduction.

The report by KBW said there were about $1 trillion worth of unused HELOCs earlier in the year, and $1.2 trillion of used lines and other home equity loans. Such numbers illustrate the importance of HELOCs to consumer spending, the report said.

The report also said Washington Mutual has cut HELOCs most aggressively, probably because earlier this year it had the highest exposure of home equity borrowings against its capital. The lender has since gotten a $7 billion capital infusion from investors.

First of all how much choice do the various lenders have in not allowing their to fight any reduction? Stating that the borrowers have no rights sounds like they are asking for lawsuits. Secondly it does not sound like a legal argument that borrower's lines were cut because the lender was financially irresponsible. The contract can work both ways - and we are anticipating stories about unhappy borrowers bringing these issues to the courtroom.

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