Thursday, August 7, 2008

Even Morgan Stanley is Cutting Equity Lines

It has been increasingly common for the various home equity lenders to reduce or eliminate equity lines. We have profiled stories here, here, here and here. What makes Morgan Stanley stand out is the affluence of their customer base. These are high end customers, many have accounts with the "wealth management" division. This seems to be big news, first let's take a look at the Wall Street Journal article called Even the Rich Get Home Equity Yanked.

Wall Street firm Morgan Stanley added some of its well-heeled clients to the long list of customers whose lenders have frozen or reduced their home-equity loans.

While federal laws do not allow lenders to force responsible borrowers to repay the loans immediately, those same federal statutes allow lenders to reduce or eliminate customers' home-equity lines of credit if the lender can reasonably determine that a borrower's home has fallen in value.

"A segment of clients was recently notified of a change in the status of their home-equity line of credit due to a change in the value of their property and/or their credit profile," a spokeswoman for Morgan Stanley said.

While the article notes a segment it does not give details or profiles. Are many of these clients from super bubble areas that have seen massive declines or is equity being assessed across the board.

Another point to make is that during the bubble an ideology came about that there was better places to have your money than to pay off your equity. Since mortgages were low rate and tax deductible smart investors were putting their money elsewhere.

Bloomberg also addresses the Morgan Stanley issue with an article titled Morgan Stanley Said to Freeze Home-Equity Credit Withdrawals. Lets take a look -

Morgan Stanley, the second-biggest U.S. securities firm, told thousands of clients this week that they won't be allowed to withdraw money on their home-equity credit lines, said a person familiar with the situation.

Most of the clients had properties that have lost value, according to the person, who declined to be identified because the information isn't public. The New York-based investment bank will review home-equity lines of credit, or HELOCs, monthly from now on, the person said yesterday.

``Morgan Stanley periodically reassesses client property values and risk profiles,'' said Christine Pollak, a Morgan Stanley spokeswoman in Purchase, New York. ``A segment of clients was recently notified of a change in the status of their home- equity line of credit, or HELOC, due to a change in the value of their property and/or their credit profile.''

``It's evidence that they don't think the economy is going to recover quickly,'' said Brad Hintz, an analyst at Sanford C. Bernstein & Co. in New York who rates Morgan Stanley shares ``outperform'' and who owns some of the stock. ``The fact that they're trying to get ahead of the problem is very good.''

``Morgan Stanley customers are typically coming out of their wealth management side, so typically a high net worth customer,'' said Christopher Whalen, co-founder of Institutional Risk Analytics in Torrance, California. ``This shows you they are under the same pressures as everybody else.''
Interesting to note only some of the lines were pulled due to house values. Wonder why some of the other reasons the equity lines were pulled. Perhaps change in credit rating or employment status and/or income levels. (That would be an interesting concept - to lend what people can actually pay back.)

Finally, due to the status of these clients we would be surprised if all the cut equity lines were not checked and re-checked. We are expecting lawsuits to come regarding cuts in equity lines, this could be one of the main generators.

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