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Bailout can put home equity back on track
(Omaha World-Herald (NE) Via Acquire Media NewsEdge) Oct. 5--Mike Scofield was remodeling his kitchen when his bank called to say it was freezing his home equity line of credit.
Luckily, he was mostly finished and didn't need more cash.
"But it was always nice to have as a cushion if I needed it, if something went wrong with the house," Scofield said. "If the furnace blows up, I'm screwed."
Risks of the current economic crisis are real for homeowners who have relied on home equity lines of credit to pay for a child's college tuition, fund a construction project or cover the family vacation.
A recent survey by the Federal Reserve Board, conducted even before the latest economic setbacks, indicated 60 percent of banks expected to tighten credit standards through the end of 2008. Approximately 40 percent of the banks anticipated the conditions to extend into the first half of 2009.
However, a check last week of local, regional and national banks operating in the Midlands showed that few lenders were freezing existing lines of credit. Generally speaking, the institutions that are freezing existing lines appear to be banks with branches nationwide.
The banks surveyed were still issuing new home equity loans and lines of credit -- although under tighter standards than six months to a year ago.
Bankers said the Midwest's conservative lending practices spared them from consequences that would have required limiting home equity withdrawals.
"But it is starting to creep this way and cause a little more of an issue in the Lincoln and Omaha markets," said Roger Ludemann, executive vice president of retail banking at TierOne Bank, a Lincoln-based bank that operates mostly in Nebraska.
"I think it's probably the biggest symbol of the way credit is tightening across the country, even in robust markets like Des Moines, Omaha and Lincoln."
The economic rescue plan passed by Congress and signed Friday by President Bush won't immediately reverse tighter lending standards, Ludemann said, but it should help home prices rebound. A housing rebound is integral to the overall recovery of the economy.
"The beauty of this is we really think this action by Congress will get us back on track and allow us to get back to normal faster," he said.
During the housing boom, people frequently turned to the equity in their homes to fund spending, and banks eagerly issued loans because they were backed by rising home values.
But millions of boom-era mortgages rooted in faulty lending are now in foreclosure, and home values are falling, most dramatically in states such as California and Nevada. Many of those mortgages were packaged, parceled and sold to investors. Securities based on those mortgages also have fallen in value, and no one wants to buy them.
The result is a slowing of borrowing and lending that now threatens to affect the everyday consumer. Some banks have trouble accessing money to lend, and falling home prices make lending more risky.
Midlands bankers said they have tightened lending in response to falling home prices and borrowers' ability to repay in a tougher economy, not because the banks can't access money
"We look at the whole thing and decide what people can afford," said Rajive Johri, president of Omaha-based First National Bank. "In the past, many banks -- some don't exist (anymore), because they were lending on the future value of the home. . . . We've always been conservative in the sense that we lend to customers in our footprint."
Scofield's home equity line of credit, or HELOC, is through USAA, a national financial services company that serves 6.4 million military members and their families, according to its Web site.
USAA wants to make sure that homeowners' credit is in line with home values, Scofield said a company representative told him.
The company lowered his $25,000 credit line to $17,000 -- the amount he already has withdrawn -- unless he reapplied and had his home re-appraised. He declined. Scofield said he didn't need more money and doesn't like having the debt anyway.
Scofield, a financial services manager for CSG Systems, said the action surprised him because his finances are strong.
A real estate agent recently appraised his 1914 Cathedral-neighborhood home at $150,000 to $160,000 -- about $40,000 to $50,000 more than he paid in 2004, Scofield said.
"My credit is almost impeccable. I don't have really any large outstanding balances," said Scofield, 35. "If they're doing it to me, I'm assuming they are doing it for a lot of other people."
Another national bank, Wells Fargo & Co., whose plan to purchase Wachovia Corp. would make it the nation's largest retail bank, said it has tightened some HELOCs on a case-by-case basis.
The San Francisco-based bank conducts "periodic reviews of home equity lines of credit to help make sure that the limit on the account is in line with the borrower's financial condition," said spokeswoman Mary Berg.
"Recently we have increased the frequency of these case-by-case reviews due to market conditions, and we have seen an increase in the number of borrowers affected," she said via e-mail.
Those reviews, which started earlier this year, consider credit scores, debt levels, payment history and changes in property value.
First National Bank, Mutual of Omaha Bank, TierOne Bank, Pinnacle Bank and Bank of the West representatives said they are not freezing existing HELOCs. All are local or regional banks. But several reported that with new loans, they more closely examine a home's loan-to-value ratio, which is the outstanding loan balance compared with the market value.
Loans of 90 to 100 percent of value were common three or four years ago for customers with the best credit. Many banks have lowered that to 80 to 90 percent.
Here's an example of how the loan-to-value ratio works:
Say, a year ago, your home's market value was $100,000 and you owed $60,000 on the mortgage. You would have $40,000 in equity. If the bank used a 100 percent ratio, you could get a $40,000 loan.
But if the bank used an 80 percent loan-to-value ratio, you could get only $20,000 in a home equity loan. The combined loans -- the $60,000 first mortgage and the $20,000 home equity loan -- add up to 80 percent of the home's $100,000 value.
If the home's value shrank to $90,000, you still owed $60,000 and banks were using an 80 percent loan-to-value ratio, you'd qualify for only $12,000.
"The better your credit status and the lower your loan-to-value, the safer your loan and the lower your (interest) rate. It's that simple," said TierOne's Ludemann.
Most affected are people in that "fringe area" -- typically younger homeowners who haven't built up a lot of equity.
Years ago, they could get HELOCs. But maybe not anymore.
"The new applicants are getting squeezed in two directions. The equity is shrinking in their homes, and the loan-to-values are coming down," said Bruce Heysse, executive vice president and manager for Bank of the West's consumer direct lending division in Fargo, N.D.
Not all banks have lowered loan-to-value ratios.
"We continue to loan on about the same standards," said Mark Hesser, president of Pinnacle Bank, based in Lincoln. "The key ratio is the repayment ability of the customer."
Hesser doesn't anticipate the bank's loan-to-value ratio changing.
Banks that have not yet frozen existing equity lines of credit said they could not rule out future freezes if conditions worsen.
"To date, we've not elected to freeze lines or reduce limits," Heysse said. "It doesn't mean we don't keep an eye on the portfolio and reserve the right to do that moving forward."
--Contact the writer: 444-1183, christine.laue@owh.com
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Copyright (c) 2008, Omaha World-Herald, Neb.
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