Tuesday, December 30, 2008

No More HELOC for College

It is almost universally agreed that not all debt is bad. Debt for educational purposes - like college - will almost always pay off in the end. Most parents want to send their children to the best college they can - which often means unaffordable tuition. HELOCs were often used to fill the gap between what a family could otherwise afford.

Now with HELOCs being shutoff - the next generation can get shut out of college or at least downgraded. Four year privates will go to public. Public univerisity will go to the local community college. Colleges will eventually feel impact - and perhaps stop raising their tuitions at double digit levels. But that will not help people in the middle of their studies. Which brings us to an article from the Chicago Sun Times titled Frozen home loan hurts family. Lets take a look -

[T]he home equity line of credit [Jim and Cindy Ranallo] were relying on to get both boys through school was unexpectedly frozen by JPMorgan Chase weeks before their elder son's recent tuition payment was due.

On Sept. 13, the account's balance went from $44,004 to $0.00.

They had never been late on a payment for either mortgage, and their shock quickly turned to panic. After learning that Chase received $25 billion in federal bailout funds, and after getting no response from a host of elected officials they contacted, they're angry.

Chase froze 200,000 home equity lines this year, a bank spokesman said. Bank of America, Countrywide Financial and other banks large and small have taken similar measures, anxious in a depressed housing market that they may not recoup money they lent.

"The reality is that homes are unfortunately not worth what they had been a year or two or three ago," said Tom Kelly, spokesman for JPMorgan Chase. "We're trying to protect both the borrower and the bank from borrowing more than the house was worth."

Translation for what Chase is really saying - we would rather lose you as a customer then own your property.
During the boom years lenders readily gave over 100% financing and/or equity access. Now most places are capped at 80% - and some of the super bubble areas with big declines require even more equity.

But do not let the lenders fool you - the cost benefit analysis of shutting off a HELOC is worth it. Either the customer spends their own money and hires and an appraisers and/or a lawyer they have almost no chance of getting access to their equity. The loss of the customer is much less than the loss of foreclosing a property.

Although the lender has been infused with taxpayers dollars, taxpayers will see little benefits. The 7 and 8 figure paychecks of Chase upper management are too important. Upper management probably needs hefty pay and retention bonuses so they do not leave for Lehman Brothers , Bear Sterns , Indymac , a magical company that will pay significantly more than they are making now. These are the smartest people in the country, not the ones who helped cause the problems.

Perhaps the Ranallo's can take comfort in knowing that by losing their HELOC they are helping those who are more fortunate than they are.

1 comment:

Anonymous said...

Unfortunately for me today the all dreaded emergency that required tapping into the heloc, met a rude awakening when I took a 2hour drive to cash a 6000.00 check in order cover payment already made only to be told by the bank were sorry this check is no good, you've been FROZEN. Didn't you get our letter last month? We want to thank you for being a loyal customer for 16 years! Never making a payment late!
Thanks for actually investing that money in you home! Thanks for bailing us out, and sorry that check is gonna bounce!!!!!!!!!!!!!
Is there anything else we could help you out with today?