Wow! I truthfully never thought I would see a story about lenders walking away from home equity loans [subscription required] rather than foreclosing on the home, but the Wall Street Journal reports that several banks are doing just that. Instead of foreclosing the home, mortgage companies which provided borrowers with equity lines or second mortgages on the property are walking away, writing off the loss and just leaving a lien on the property with the hope that some day in the future, when the house is sold or the owners want to refinance, they'll get their money.
Lenders that told the Journal they were writing off the loan rather than foreclosing include Bank of America (NYSE: BAC), Countrywide (NYSE: CFC) and Washington Mutual (NYSE: WM). Why would they just walk away? With home prices dropping, even if they did foreclose, they probably wouldn't get much or any money out of it anyway. Many of these homeowners owe more on the house than its worth. Only lenders with the first mortgage are likely to get any money by forcing a foreclosure.
Moody's estimates that losses on home-equity loans outstanding as of June 30, 2007 could ultimately total $58 billion on top of the $278 billion in losses on mortgages. "You can make a horrible decision by choosing to foreclose, " Steve Baily, a senior managing director with Countrywide, told the Journal.
In a related move, lenders are starting to reduce the amount of credit available on existing home equity lines if they see signs of trouble on the homeowner's credit report. Most banks do have provisions in their equity line agreements to reduce the available credit on the equity loan if the credit report indicates the borrowers are having trouble paying their bills. For example, Citigroup (NYSE: C) told the Journal that "under the borrower's credit agreement, it is permitted to freeze home-equity advances or reduce credit limits if the home's value has declined below the original appraisal, or if it reasonably believes the borrower won't be able to make the required payment."
If you are having trouble meeting your bills, don't be surprised if the available credit on your home equity line is reduced, or your ability to write more checks based on your available credit is frozen. Banks are starting to audit home values and reducing credit lines if there isn't enough equity left in the home. Washington Mutual told the Journal that it notified 3,200 customers with home-equity lines that it would reduce the amount they could borrow against those lines.
Banks are acting defensively to try to minimize their losses and stop the bleeding on their balance sheets. It's about time. It will be a hard pill to swallow if your equity line is frozen, but it's a necessary medicine for all who get it. If your equity line is frozen, or your allowable credit line lowered, you're in over your head and it's time to rethink what you're doing financially.
Lita Epstein has written more than 20 books including "Reading Financial Reports for Dummies."
New Facebook share structure hints at IPO
Before the bell: Futures higher ahead of housing, jobless data
Nuclear power is on the comeback trail
Reader Comments (Page 1 of 1)
2-04-2008 @ 11:53AM
rick said...
A write-off is an accounting term, not a legal term. It means that the lender was forced to write the receivable off as a bad debt expense. It doesn't mean that they can't try to recoup the losses.
3-24-2008 @ 7:11PM
Mad said...
If the banks were actually lowering credit limits on equity lines based on reality, it would be fair, but they're just screwing people to cover themselves. Case in point: I bought my house 6 years ago, before prices skyrocketed. Even at deflated prices I have over 200 K in equity. I just got a letter from Citibank lowering my credit limit from 160 K immediately and without notice to 35 K -- which is the exact current balance. I am about 75% done with a remodeling project, but now put into a bad spot by this arbitrary action. A reasonable reduction based on actual values would have been fair, but effectively freezing the account is way out of line.
3-28-2008 @ 11:02PM
Chris Shaw said...
Though they are written providing notice, WAMU has now begun reducing lines in FL. I received notice this week basing the decision on "a significant decline in the value of my property". However, how "significant" is defined cannot be determined, since WAMU, through their loan care center in TX, stated that they will not provide the "updated value" they are relying on to make this decision. Do I not smell a regulatory compliance issue here? The language included in my orig. loan documents define the basis of a "significant decline" as the value they relied on at the time of application - which was never provided to me as the borrower. Again, misleading. In addition, should you want to dispute this action, you as the customer, are required to pay for the cost of a full appraisal, which would cost $200-$300. Once again, a requirement that was never included or stated in the original loan documents. Is WAMU possibly making these rules up as they go? And none of this is helping those WAMU borrowers who are and have faithfully met their obligations to WAMU without issue. In fact, you are likely being double penalized because as they reduce your line, your utilization rate effectively increases which will likely have an unfavorable impact on your overall credit score. Nice. Beware - folks, things with WAMU are not as they may seem. Make their primary regulator, the Office of Thrift Supervision, aware of it. Send your issue(s) regarding WAMU to The Office of Thrift Supervision Consumer Affairs Department, Western Regional Office, P.O. Box 7165, San Francisco, CA 94120, visit WWW.OTS.TREAS.GOV (Consumer Inquiries), or call the OTS at 1-800-842-6929.
1-18-2008 @ 1:12AM
John said...
The reason why banks are walking away from the delinq. home equity lines and seconds are that they are in second lien position to the first mortgage. So what that means is for them to foreclose they would have to pay off the 1st position before they could recapture their loss. This practice isn't surprising it has always been this way. It would not make economical sense to any lender to pay off a larger amount to recapture a smaller loss.
1-18-2008 @ 1:45AM
Lita Epstein said...
John,
While you're right about why banks are not foreclosing today on loans in 2nd or third position, prior to the dramatic drop in house values banks in second position did file for foreclosure. As long as housing prices are rising, there usually is enough to go around for the lenders in both 1st and 2nd position. Third position has always been more risky. Until the slowdown in the resale market, homeowners were usually able to sell their home or refinance before facing foreclosure. What's happening now with home values falling below the value of even the first mortgage is a relatively recent phenomena.
Lita
1-17-2008 @ 9:38PM
John said...
This practice shouldn't be surprising to anybody. Most people that apply for a home equity line already have a larger first mortgage which is in first lien position. What this means is to recapture the loss on the loan the bank holding the home equity line would have to satisfy the 1st mortgage before foreclosing on the property which would not make economical sense.
1-18-2008 @ 2:11PM
RobK said...
"It will be a hard pill to swallow if your equity line is frozen, but it's a necessary medicine for all who get it."
thats about as usefull as an oil light that comes on in your car after the engine has seized. How about something proactive ... like punishing companies that make predatory loans or maybe banks should only finance the physical replacement values of homes along with a minimal amount for a lot ... that would have at least kept home prices realistic.
1-18-2008 @ 11:04PM
Irv said...
Equity lines of credit are what get many homeowners into trouble to begin with. Years ago they were unheard of, but today they have become commonplace. They should be severely limited, if not eliminated entirely. They just encourage people to spend secured money on trivial things, which can put the homes they live in into jeopardy. This is yet another maneuver banks have to make money off people, with little regard for the potential tragic circumstances that can eventually befall them.
1-20-2008 @ 4:23PM
undrgrndgirl said...
so, essentially these lenders are gonna try to stick someone else's debt on the back of a new buyer...disgusting...
just a sticking point about language...the way i understand "write-off" - means the elimination of the debt (with no attempt to recoup it, ever)...this could have consequences to people who are understanding the term in the way i do and the way the banks are using it...
alas, more troubles ahead...
1-22-2008 @ 6:38AM
daveg said...
I've been following the housing bubble situation closely and was inspired to write a song. You can see the video here:
http://www.youtube.com/watch?v=Ivp4YqGCI-s