The Home-Equity Door Slams Shut

By Pat Mertz Esswein
Kiplinger's Personal Finance
Sunday, July 6, 2008

Some 122,000 borrowers with Countrywide home-equity lines of credit, or HELOCs, received letters in January informing them that they could no longer withdraw funds from their lines. A few months later, thousands of customers of other major lenders -- including Bank of America, J.P. Morgan Chase, Citibank, SunTrust, USAA, Wachovia, Washington Mutual and Wells Fargo -- also received notice that their lines had been frozen or reduced.

It's a jolt to borrowers who have relied on their home-equity line as an emergency fund or an all-you-can-eat buffet.

Home-equity lenders' anxiety has soared along with mortgage delinquency and foreclosure rates. That's because when borrowers default, second-lien holders are unlikely to collect a cent after the first-mortgage holder gets its due.

Lenders uniformly cite their right, as disclosed in HELOC contracts, to reduce or suspend a borrower's line of credit if home values fall significantly or if the ability to repay the loan is in jeopardy. Beyond that, they won't say much. Home-equity executives from five banks we contacted were unavailable for interviews for this report.

Lenders who pull the plug will invite you to contact them to discuss your situation and appeal the decision. You may have a case for appeal given that the "automated valuation method" that lenders use to determine property values tends to paint with wide brush strokes. To prove your case, you'll have to pay for a walk-through appraisal of your home, which could cost $200 to $400. Or you may be able to provide "comps," a record of recent comparable sales in your area (your lender will tell you how recent and how near).

Countrywide's letters advised borrowers who had outstanding checks to contact the company to discuss how they would be handled. Borrowers who had planned to use their line of credit for a major expense within the month were told that Countrywide would try to work with them. Homeowners in the midst of major home-renovation projects were asked for signed statements from their contractors. Washington Mutual spokeswoman Sara Gaugl said that her company, too, would "continue to assist customers who may have unique or special situations."

Some borrowers worry that their credit score will suffer when their line of credit is frozen because the credit-scoring model will assume they maxed out their credit. Ethan Dornhelm of Fair Isaac, which issues FICO scores, said the company's scoring model is designed to exclude HELOCs from such calculations.

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