Homeowners lose equity lines

Top lenders react to drop in house values

WASHINGTON — In one brief phone call, Nancy Corazzi’s lender yanked away what was left of the $95,000 home equity line of credit that she and her husband took out five months ago.

The lender informed her that her Howard County, Md., home had plummeted in value and the company did not want the risk that she would owe more than the house was worth.

"I got off the phone, and I was shaking," said Corazzi, who was using the money to pay preschool tuition for her twins. "I was near tears. We needed this credit line to get us through some tough times."

Several of the nation’s largest lenders, along with smaller ones, are shutting off access to home equity lines in areas where home values are declining. It’s an unusually aggressive move as the industry grapples with fallout from the mortgage crisis that began unfolding last year.

Now that home prices have dropped in many parts of the country, lenders are nervous that they may never collect the money that they extended to borrowers. They are responding by freezing or lowering the credit limits on home equity lines, leaving thousands of borrowers like Corazzi in the lurch.

"Nearly all the top home equity lenders I know of are doing this or considering doing this," said Joe Belew, president of the Consumer Bankers Association, which represents some of the nation’s largest home equity lenders. "They are all looking at how to protect themselves as real estate values go down, and it’s just not good for the borrowers to get so overextended."

Many lenders cut back

Richard Courtney, principal broker at Fridrich & Clark Realty LLC Music Row and past president of the Greater Nashville Association of Realtors, said Middle Tennesseans with home equity loans are probably safe.

"It hasn’t happened here at all right now, and it won’t happen because our prices are holding stable. Our home prices are actually increasing," Courtney said.

"It has happened here in the 1980s, when home mortgage rates were as high as 18 percent, and that caused the values of the homes to drop, and a number of people had their equity lines and mortgages terminated. They owed more on the house than the house was worth."

Countrywide Financial, the nation’s largest mortgage lender, suspended the home equity lines of 122,000 customers last month after reviewing their property values and outstanding loan balances. The company, like others, has an automated appraisal system that tracks values.

USAA Federal Savings Bank froze or reduced credit lines for 15,000 of its customers, including Corazzi, and will not reconsider its decisions until "real estate values improve substantially," the company said in a statement.

Bank of America is starting to do the same and is contacting some borrowers, said Terry Francisco, a bank spokesman.

"We know this can cause hardship to our customers," Francisco said. "If they used the credit to make payments that are in the pipeline, we will work with them to make sure the payment goes through."

Foreclosures alter policy

The appeal of home equity lines has always been their flexibility.

They operate like credit cards, with the home as collateral. Borrowers can use the money when they want, up to a limit, then repay it over time. The limit depends on the amount of equity they have in the house. Home equity lines, which grew popular in the late 1980s, have typically attracted educated borrowers with above-average incomes and job stability who tend to repay what they borrow in a timely manner, industry studies show.

Since the crisis in the housing and mortgage markets started, however, delinquencies on home equity lines reached 0.84 percent in the third quarter, the highest level in a decade, the American Bankers Association said.

Because missed payments are often a precursor to foreclosure, lenders are spooked. Companies that hold credit lines typically recoup little, if any, of their money in a foreclosure, hence the retreat on home equity lending.

Larry Pratt, chief executive of First Savings Mortgage in McLean, Va., said most mortgage documents he has seen give lenders wide latitude to suspend or freeze credit lines.

Last year, 34 percent of borrowers said they used their home equity lines to pay off other debt and 29 percent used them for home renovation, according to a survey of lenders by BenchMark Consulting International. An additional 31 percent used them to pay for things such as medical bills, weddings or vacations.

Borrower was blindsided

Corazzi initially used her line to consolidate debt. She and her husband took out the credit line in October because they thought her job was in jeopardy.

It was. In December, her salaried position as a loan-processing manager at a local mortgage bank changed to a commission-only job.

Given the slowdown in the industry, Corazzi has collected only one paycheck since then. Her husband, Ron, sells large-format copiers and printers to builders, and his salary alone cannot support them and their four children, ages 4 to 8.

By the time their lender called, the couple had $45,000 remaining unused on the credit line. Ron Corazzi is looking for a second job, and his wife is hoping to pick up work as a substitute teacher.

Meanwhile, they are trying to open a new home equity line elsewhere, but chances are slim given the change in Nancy Corazzi’s job status and the drop in their home’s value.

Five months ago, the Ellicott City house was appraised at $560,000; the lender says it is now worth $469,100.

Corazzi said she was blindsided by what’s happened.

"I didn’t know they could do that. I thought I was too smart to have something like this happen to me."

By DINA ELBOGHDADY
The Washington Post