http://www.nytimes.com/2008/04/13/business/13gret.html
The New York Times
April 13, 2008
Fair Game
You Thought You Had an Equity Line
By GRETCHEN MORGENSON
IT was the nation's lending institutions and mortgage originators that
got us into this credit mess, but it is consumers, taxpayers and those
companies' shareholders who will end up shouldering most of the costs.
The latest example of this is in the mass freezing of home equity lines
of credit going on across the country. Reeling from losses on their
wretched loan decisions of recent years, lenders are preventing
borrowers with pristine credit and significant equity in their homes
from tapping into credit lines that they paid dearly to secure.
In the last 30 days, lenders have sent several hundred thousand letters
advising borrowers that their home equity lines of credit are frozen,
estimated Michael A. Kratzer, president of FeeDisclosure.com, a Web
site intended to help consumers reduce fees on home loans.
<snip>
Banks have the right, of course, to rescind these credit lines at any
time under the terms of the contracts they struck with borrowers. And
as home prices have tumbled in many parts of the country, banks are
undoubtedly trying to protect themselves from exposure to additional
losses.
But these actions are being taken even in areas where property prices
are rising, Mr. Kratzer said. What's worse, the letters provide no
explanation for how the lenders determined that the property values
underlying the equity lines had fallen.
Frozen home equity lines will surely intensify the consumer spending
downturn and put added pressure on an already weak economy. Indeed, on
Friday, consumer confidence as measured by the University of Michigan
plummeted to its lowest level since 1982. The drop was attributed
mostly to higher fuel and food costs, but consumers' views on their
current and expected personal financial situations dropped to their
lowest readings since November 1982 and April 1980, respectively.
One especially exasperating aspect of now-you-see-them, now-you-don't
equity lines is that borrowers are not receiving refunds for fees they
paid to secure the credit in the first place.
These fees can be significant, Mr. Kratzer said: on a $50,000 line, for
example, fees of $1,500 are common. If the line is being frozen at,
say, $25,000, why shouldn't the borrower be entitled to receive a
refund of $750?
Borrowers who have an excellent credit score may also find that status
hurt when a home equity line is frozen. That is because when a lender
suddenly caps a $50,000 line at $25,000, the borrower will appear to
have tapped the entire amount of the loan, a factor that can reduce a
person's credit score. Never mind that, based on the original amount of
the credit line, the borrower is using only half of it.
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Him who's got the gold, writes the rules.
Michael