By JUNE FLETCHER
May 15, 2008
Across the U.S., sellers with good credit who have never been late on a mortgage payment are getting their home equity lines of credit (HELOCs) frozen or downgraded. Major lenders like Bank of America, Citibank, Countrywide Financial Corp., Washington Mutual Bank and USAA have announced that they're cutting back HELOCs in areas where home prices have taken a hit.
But judging by a recent post about HELOCs on WSJ.com's Developments blog and one reader's comments to that blog, lines of credit aren't just being frozen in places where prices have declined. Take Manhattan, where median condo prices jumped 13.2% to $945,276 in the first quarter of this year over the same period a year earlier, according to real estate firm Prudential Douglas Elliman. In response to that blog post, one New York couple wrote in and said that despite their "excellent credit" and a $300,000 household income, their credit line was slashed as the result of a bank appraisal that came in at half the market value for their $1 million apartment. They had to pay for a new appraisal to get their line of credit reinstated.
It gets more bizarre. I own a vacation condo in Naples, Fla., where local real estate broker Glenn Ginsburg of A Delta Realty of Naples reports condo prices have declined 7.7% to $300,000 in the first quarter of 2008 from the same quarter in 2007. Yet my lender, Countrywide, just sent me a letter this week inviting me to cash out some of the equity in my place, which they mysteriously figure at $54,302. (The fine print on the back of the offer says this sum is based on "statistical data," not on an appraisal, and the solicitation isn't a commitment on their part).
I bought my home in 2004 for $220,000, and judging by recent sales of identical models, it would currently sell for around $250,000.
I don't know which lender the New York reader was using. But I was curious why I was being solicited for a new HELOC in a shaky market like Naples. So I contacted Countrywide, and asked to speak to a spokesperson about it. No one returned my call. Instead, I received an e-mailed statement, which said the company was reviewing the loans it's servicing to determine the impact of lower property values, and would write to customers whose accounts they're suspending (so far, 122,000 customers have been affected nationwide). The statement added, "These measures do not impact the company's desire to originate new home equity lines of credit based on current property values and borrower qualifications."
For borrowers, such unpredictability can be maddening. Unfortunately, lenders are within their legal rights to freeze or even withdraw a HELOC for circumstances spelled out in a loan's documents. Worse, if your loan has been sold, the new mortgage holder may require some additional proof that you still meet the original conditions of the loan.
That doesn't mean you can't question a HELOC shutdown. Start by asking the lender to tell you in writing what caused the freeze, what steps you can take to thaw it and when your line of credit will be unfrozen. If the problem is something you can fix — say, an error on your credit report that hurt your credit score — take steps to correct it.
If the lender refuses to tell you the reason for the freeze, or the cause they give you isn't mentioned in your loan documents, it could be time to call in the regulators. Click here to find out which regulator covers your lender.
However, if you don't need the cash, you might want to consider your frozen HELOC a blessing in disguise. For too long, lenders have enticed borrowers to jeopardize the roof over their heads to pay for transient pleasures like vacations or to knock down credit card debt. Now that the housing market has cooled, the folly of that way of thinking is finally as clear as ice.
Write to June Fletcher at june.fletcher@wsj.com