Tens of thousands of homeowners with home equity lines of credit are getting a rude surprise: They’ve been told by their lender that they can no longer take money out on their credit lines because sinking home prices have left them with little or no equity.

Among the lenders taking such action is Countrywide Financial Corp., which sent 122,000 letters to customers last week telling them they could no longer borrow against their credit lines. In some cases, according to the company, the borrowers are now “upside down” -- the total debt on the home exceeds the market value of the property.

Calabasas-based Countrywide, the nation’s largest mortgage lender, says it uses computer modeling that factors in changes in home prices to determine which customers will have their money tap shut off.

The cutoffs are coming as a shock to some.


“We didn’t deserve this,” Thaleia Georgiades, a real estate agent in El Dorado, Calif., said Thursday, two days after she and her husband, a builder, learned that their Countrywide credit line had been frozen.

“When you are self-employed, that’s the money you count on to bridge the gap during tough times. And this is a particularly tough time in both the building and housing industries,” Georgiades said.

In Phoenix, Kristen McEntire said she received a letter from San Antonio-based USAA Federal Savings Bank about two months ago saying the credit limit on her home equity line had been slashed by $40,000 because the value of her home had declined.

“They froze everything but about $5,” she said. “That’s what I had left in the line of credit” after the bank’s action.


A USAA spokesman said the bank had cut credit limits in “a small number of cases” because of lower home values.

McEntire, 33, who works for a mortgage broker, said she had been using the credit line to help make payments on another home that she owned and had rented out.

“I thought that if I only had to keep doing that for five or six months, I could make it up later,” she said. Instead she found herself borrowing $12,000 on credit cards.

“I want to act responsibly, so I don’t foreclose on either property,” she said.


The moves to rescind credit lines are part of a pullback by lenders nationwide on home equity loans, which are often used to finance home improvements and consumer spending. Such loans, also known as second mortgages, were widely available until six months ago, when delinquencies and foreclosures began to soar.

Now, with new evidence of sinking home values, many lenders are requiring that homeowners maintain a much larger percentage of equity in their homes as a cushion against financial problems.

Pasadena-based mortgage lender IndyMac Bancorp last week sharply cut back on issuing new home equity lines as part of a move to focus on loans that can be sold immediately to investors. An IndyMac spokesman said he couldn’t say whether the lender was looking at existing credit lines with an eye to suspending them.

Chase Home Lending, a unit of banking giant JPMorgan Chase & Co., one of the country’s largest home equity lenders, is imposing new guidelines next week that will further restrict who can get a new credit line, the company said.


Through this week, Chase customers in California can tap as much as 90% of the equity in their homes. Starting Monday, however, that limit goes down to 85% in most of the state. In six counties, including three in Southern California -- Los Angeles, Orange and Imperial -- Chase won’t let homeowners borrow more than 70% of the value of their homes. The bank wouldn’t say how the six counties were chosen.

In Florida and Nevada, Chase’s loan limits are going down Monday to 70% and 65%, respectively. The percentages will be even lower for people who don’t have the best credit.

“Our goal is to always make sure that for both our sake and our customers’ sake that our customers don’t owe more than their equity,” Chase spokesman Thomas Kelly said.

Chase is still assessing whether to rescind existing lines of credit, he said.


Falling home prices are also affecting how first mortgages are being made. Fannie Mae, the giant government-sponsored mortgage investor, has told lenders that in areas that experienced significant price declines, including much of Southern California, the company will require a lower maximum “loan to value” ratio on loans it buys.

As a result, on a highly promoted Bank of America Corp. loan for which borrowers pay no upfront fees, the maximum loan amount is being reduced in most of Southern California to 90% of a home’s value, down from 95%, said Terry Francisco, a spokesman for the bank, which has agreed to acquire Countrywide. And on a program that gives mortgages to firefighters and police, the limit is falling to 95% from 100%.

Few lenders would extend credit totaling more than 80% of a home’s value a decade ago, and the industry appears to be headed back in that direction, said Guy D. Cecala, publisher of Inside Mortgage Finance Publications in Bethesda, Md.

A home equity loan that puts the total debt on a home over that level can be especially risky for the lender. That’s because if the property goes into foreclosure, Cecala said, “All the money goes to pay off the first mortgage holder.”


In fact, in cases of foreclosure, home equity loans are being sold to adventurous investors for as little as 3% of the amount of the loan, said Paul Muolo, data editor for National Mortgage News.

Many lenders, including Citigroup Inc. and JPMorgan, reported lower fourth-quarter earnings because of losses on home equity credit lines.

San Francisco-based Wells Fargo & Co., which avoided many of the costly mistakes in mortgage securities and sub-prime loans that have plagued rivals, just added $1.4 billion to its provision for loan losses, mainly on home equity loans.

Wells Fargo executives “did not fully appreciate the severity of the residential real estate downturn and its impact on our home-equity portfolio,” Mike Loughlin, chief credit officer at Wells, said in a statement this month. Representatives of Wells Fargo declined Thursday to talk about its problems with home equity loans.


Some small lenders also have been forced to change their policies in response to the downturn in home prices. Cityside Federal Credit Union in downtown Los Angeles, which has 6,482 members and $53 million in assets, has cut its maximum loan-to-value ratio to 90% from 100% and is rejecting many requests from members who had hoped to refinance mortgages at today’s low rates.

“A lot of people are in that situation right now because they just kept refinancing and took out all the equity in their homes,” said Teresa Becerra, a loan officer at Cityside. “They’ll have a couple of mortgages they want to combine now. But we can do a computer appraisal right away, and what they’re finding out is that the value just isn’t there.”

Cityside has had to cut off some home equity lines of credit as well as turn down borrowers seeking new loans because of the change, Becerra said. So far it has cut off credit only when customers brought up issues that caused the credit union to examine their circumstances.

“If they had home equity, and now they’re upside down and it’s brought to our attention, we’ll definitely cut them off,” she said. “But we’re not doing a computer-generated study to find all those situations or anything like that.”


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