Financial Foundations

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

Six of the big mortgage companies involved the Hope NOW Alliance announced that the Alliance is expanding its efforts to help homeowners facing foreclosure.

The rate freeze program announced by President Bush in December applied only to borrowers who were facing resets on subprime adjustable rate mortgages but who were current, in fact had never been delinquent, on their mortgage payments.

The new program dubbed Project Lifeline extends earlier Hope NOW efforts to include those who are seriously delinquent whether their problems are with subprime, Alt A or prime loans and will even assist those in foreclosure with second mortgages or home equity lines.

The new program was announced in a press conference Tuesday morning at the Treasury Department. Treasury Secretary and Department of Housing and Urban Development Secretary Alphonse Jackson along with Bank of America representative Floyd Robinson and Home Now Alliance Executive Director Faith Schwartz presided.

Lifeline will be, at least at first, a joint effort by six of the largest mortgage servicers in the country; Bank of America, Wells Fargo, Citigroup, Washington Mutual, J.P. Morgan Chase, and Countrywide Mortgage. These six represent 50 percent of the U.S. mortgage market. There are another 19 services that are members of Hope NOW and Secretary Paulson expressed a strong desire to have them sign on to the new program.

Borrowers who appear to qualify for help will receive letters from their mortgage servicers notifying them of the program and their possible eligibility. These borrowers, who will be at least 90 days behind in payments, must contact the servicer within 10 days of receiving the letter and inform the servicers that they are interested in the program, that they are willing to participate in counseling if required, and they must provide financial information to the servicer. If the loan appears salvageable, the homeowner will be granted a 30 day "pause" in the foreclosure process to allow time for a loan modification or other resolution.

Bank of America’s Robinson said that the evaluation of a borrower’s situation will address the entire picture including credit card and other debt and will be transparent so the borrower knows exactly what is happening with the foreclosure and his loan.

Robinson and Schwartz recapped some of the activities of Hope NOW since it was set up to facilitate contact between troubled homeowners and those who might help them.

The hotline is now handling over 4,000 calls a day , up from 625 at its start, and there are 400 housing counselors working for Hope NOW. The organization has sent out 775,000 letters to borrowers in the last three months and has a 16 percent contact rate but hopes that this will improve as the program receives more publicity. An additional 200,000 letters are going out each month. 870,000 borrowers have been helped with their foreclosure situation and over one-half million of these have been subprime borrowers. Loan modifications doubled in the fourth quarter of 2007 over the third quarter.

One reporter asked how borrowers who are "upside down " in their loans would be treated. Would Bank of America for example, be open to writing down a loan to reflect the current market value of the home, thus forgiving that amount of debt? Robinson said he could not speak for the other servicers but that Bank of America would look at this kind of solution on a borrower-by-borrower basis.

Another reporter asked how many borrowers Project Lifeline was expected to help but Secretary Paulson refused to speculate saying that it would be up to the individual servicers to determine that number but that there would soon be a reporting system in place so that these kinds of questions can be answered.

Paulson stressed that not all borrowers can be helped by Project Lifeline or any other program. There will be some who simply refuse to make contact or who walk away from their homes and those whose financial situation makes it impossible to keep their homes "and we cannot help those who refuse to honor their obligations. But Project Lifeline has the potential to offer new solutions to responsible, able homeowners who want to keep their homes."