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Banks Pulling Back on Home Equity Loans

Don't be too quick to start that kitchen renovation

By Truman Lewis
ConsumerAffairs.com

February 23, 2008

Lenders are freezing or reducing credit lines in parts of the country where the decline in real estate values has been the steepest, the Washington Post reports.

Countrywide Financial, the nation's biggest mortgage lender, suspended the home equity lines of 122,000 customers last month after reviewing property values and outstanding loans, the Post said.

USAA, Bank of America and other lenders either have done the same or are planning to do so, according to the report.

This latest development in the collapsing real estate market is likely to come as a shock to homeowners counting on their home equity lines for home improvement projects, college tuition and other major expenses.

Last year, according to a survey of lenders by BenchMark Consulting International, 29 percent of homeowners used their equity lines for home renovation. But while home equity lines are popular with homeowners, BenchMark found lending executives becoming queasy about their exposure in a declining real estate market.

In its survey of 29 North American financial services executives, BenchMark found that more than 95% felt that the current environment will continue to get worse in 2008.

The Federal Reserve currently places the charge-off rate for residential real estate loans and lines up 150% from the third quarter of 2006 to the third quarter of 2007. But most of the executives surveyed said their charge-off rate was not that high. Most said it had increased less than 50% since last year.

And despite the increased fretting, actual default rates on home equity loans remain low. Nearly 80% of those surveyed had foreclosure rates of less than one percent. Most said they are preparing for the difficult times ahead by tightening their home equity lending and collection policies.

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