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Column: As home values fall, equity credit dries up

Mike Calhoun thought of the untapped home equity credit line on his Seminole home as his emergency fund.

"I considered this the safety net if something went terribly wrong in my business or health," he said. Luckily nothing did because Calhoun, 31, recently received a letter from his lender informing him his $50,000 credit line had been frozen because of falling home values.

"This was like a massive slap in the face," he said. "I've got a 750 credit score. I pay my bills on time every month. When I got that letter I was ticked off. If that's happening to me, you know it's happening to other people."

Indeed it is. Calhoun's lender, IndyMac Bank, is one of many that have been notifying home equity borrowers that access to their once-promised cash has been cut off.

Kevin Horan of New Port Richey says he recently got three such notices —from Bank of America, Chase and Wells Fargo — informing him that unused credit lines on three of his properties were off limits.

"Each one was about $100,000," he said. Horan, 52, said he thinks reducing the credit limits would have been a more reasonable approach, but he thinks banks have lost interest in home equity lending. "Most of the state of Florida has been called a soft market, and they don't really want to lend here."

He says all three lenders blamed falling home prices.

Adam Greenberg, 37, had used $5,200 of the $35,000 credit line on his Palm Harbor home when he discovered Bank of America had cut his credit limit to zero.

"It's a smack in the face that they would not give you any warning whatsoever," he said. "I was about to write a check to somebody on this account."

Borrowers like Greenberg who have an outstanding balance on their credit lines can pay it back under the original terms but cannot borrow more.

As the name implies, home equity credit lines are secured by home equity, which
is the difference between the value of the property and the debt owed on mortgages. When housing values decline, so does home equity and with it, the lender's security.

If a house goes into foreclosure, the first mortgage holder is first in line. If there isn't enough money to go around, the home equity lender's interest in the property can be wiped out.

"All banks are taking a real good hard look at their real estate exposure," said Joe Belew, president of the Consumer Bankers Association. "They're trying to make sure the customers don't borrow more than the home is worth. It's a matter of risk management. It's particularly important in markets like Florida where housing values have plummeted."

Because appraising each property would be costly, lenders may be making decisions based on what's happened to housing values in a ZIP code or larger area, he said.

The national delinquency rate on home equity credit lines climbed to 0.84 percent in the third quarter of last year, the highest level in a decade, according to statistics compiled by the American Bankers Association. However, the rate remains low relative to other forms of consumer credit. The rate for bank credit cards is more than 4 percent.

Debt consolidation and home remodeling projects are popular uses for home equity credit lines.

While others are pulling back, some banks continue to promote home equity credit lines. "Regions' approach to lending and underwriting is designed to allow us to lend throughout the credit cycle," Regions Bank spokesman Mel Campbell said. "Our ability to meet the needs of qualified customers remains strong."

What's a homeowner to do?

• If your home equity credit line has been frozen, ask for a refund of fees you paid. You have a good case if you never used your credit line and an even better one if you have other accounts at the bank and it wants to keep your business.

• If your home equity line has not been frozen, but you are concerned that it might be, consider withdrawing money that you know you'll need and stashing it in a money-market account temporarily. This is especially vital if you are embarking on a home improvement project you're expecting to pay for with your credit line.

• If you need to borrow money and you cannot get a home equity credit line, consider refinancing your first mortgage for a larger amount.

Column: As home values fall, equity credit dries up 03/16/08 [Last modified: Monday, March 17, 2008 1:59pm]
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