HOME EQUITY LINES FROZEN OR REDUCED - As Lenders Fear Declining Home Values!
LENDERS FREEZE OR REDUCE LINES WITH LITTLE NOTICE!
Not too long ago, here in Chicago and elsewhere, it was easy for many homeowners to draw loans against the equity in their homes. Many lenders offered credit lines, with cash as easy as a check away, for as much as 100% of the homes appraised value, minus the current mortgage balance. Rates were low, and enticing - as little as the prime rate, or slightly higher, in many cases.
Lenders felt safe - the housing market was robust, property values were increasing, and risk of default was low.
Today, as we all know, things are different! Appreciation has stalled - even turned into declining values - in many parts of Chicago and in nearby suburbs. Primary mortgage defaults are up, and so, too, are defaults on Home Equity Lines of Credit (commonly known as HELOC's in the industry).
Those with high equity lines have seen their home value fall below their total indebtedness - so HELOC lenders are taking drastic steps. Many are freezing lines of credit to the amount already drawn. Others are paring back the maximum value of the line. A few are declaring default far earlier, as allowed by the loan agreement. An occasional missed payment, or a payment coupon returned "undeliverable" by the U.S Postal Service, generates faster loan curtailment.
One homeowner in Melville NY had his $100,000 line frozen - inaccessible - because the lender feared his home's value had declined. Another in the same area had her $200,000 loan cut in half after one draw to renovate her bathroom, for the same reason.
As equity lines got easy to obtain, borrowers drew and used the money to pay down higher-interest credit cards, purchase luxury items such as boats and high-end cars, and pay college tuition for their children. Borrowers who didn't qualify for larger mortgage loans often used HELOC's to bridge the gap - or draw cash so they could buy a new, more expensive home, without the contingency of selling their old home.
Late payments on Equity Lines have increased - as a percentage of total loans issued - well over 500% since 2004, when the U.S. Housing Market was robust. Today, 1.74% of all HELOC borrowers are late on their payments, according to First American CoreLogic of San Francisco CA.
While mortgage money has already been released into the hands of borrowers, and cannot be easily "called back," equity lines can be easily frozen or reduced. Don Romano, President of Shelter Rock Mortgage in Long Island NY, explains lenders "got into a risk position by being too generous with the credit lines, and credit lines are the only form of mortgage they have the ability to minimize."
An energy commodities trader, David Seidner of New York, drew out the remaining equity from his own $750,000 HELOC, and put it in the bank, to protect himself if his lender decided to freeze or reduce his line. He now pays 6.9 interest, tied to the Prime Rate, on the money he drew, but protected himself should the lender curtail his Line of Credit.
Read Ellen Yan's article, in yesterday's Chicago Tribune, for more info.
DEAN & DEAN'S TEAM CHICAGO
