Special offer

equity line warning

By
Mortgage and Lending with First Centennial Mortgage NMLS # 132763

Many of us use obtain an equity line of credit to have as an emergency fund.  Why tie up cash if you can write yourself a check when you need it.  Isn't this one of the ways the banks market the equity line?

Yesterday I received a panic call from a past client that had obtained the line of credit in November 2006 when his home appraised for $675,000.  His equity line bank reviewed his file, ran an AVM to determine a current value that was 19% lower.  This dropped the loan to value below what was necessary to qualify for the equity loan so the bank notified them that the line of credit was being cancelled.

These clients have excellent credit scores (750) and low ratios.  They also live on the northwest side of Chicago, in an area where no two homes look alike - hardly an area that an automated appraisal system is designed for.

While the wording in the equity line disclosure indicates that the bank may "suspend additional extensions of credit" (allow you to write checks against the available line) or "reduce your credit limit" (which will show as usage in excess of authorized limit on your credit report - significantly reducing your FICO score)if the value of your home drops significantly, this action could have a significant impact on their credit and financial health until the issue is resolved. 

The notice that my client received allows them to pay $200 for a new appraisal from an appraiser approved by the bank (sounds fair to me??? NOT!) and if the value comes in higher they will refund the $200 and re-acctivate the credit line.   When asked what would happen if they took their business elsewhere, they were told that this option would trigger an early cancellation fee of $300+. 

So what do you think the customer service tag line should be changed to - "take it of leave it", "too bad", "deal with it", "not my problem", "wait until the appraisal comes in and we will see".  Respond with your vote.

I don't know about you but I use my line of credit as an emergency fund and keep the balance as low as possible by depositing all of my available cash.  Had I received that letter, I may have just deposited my payroll check with the expectation of paying my mortgage payment with an equity line check.  Has anyone looked at the "Mortgage Accelerator" program?  Guess what would have happened if the mortgage payment bounced!

For all of you that use an equity line of credit, look at your closing papers - disclosure of terms and beware.  Don't use your last $$$$ of liquidity to pay down your line because it may not be available to you tomorrow!  This morning I stopped at the bank and moved my available funds from my equity line to my checking account.  If I have to pay some net interest, it is better than letting someone come during the night an mess up my financial flexibility.  Have a great day!

Sean Allen
International Financing Solutions - Fort Myers, FL
International Financing Solutions

hhhmmm, I'm surprised that we don't/haven't seen banks doing this more often. In the banks eyes, it is the prudent thing for them to do, unfortunately it can put a financial hardship on the home owner if they are living above their means.

Sean Allen

Apr 23, 2008 06:04 AM
Angelo Cusinato
First Centennial Mortgage - Barrington, IL
CRMS, CMC, Mortgage Specialist NMLS # 207204
Sean, No question that people should not live above their means, but in many cases, homeowners use the euqity line feature for "emergency funds" rather than leave dollars sitting in the a low yield investment.  My concern isn't that the bank needs to be protected, just that the bank's actions could impact a homeowners credit score and financial flexibility during the period of transition to alternative strategies.  Further, if this results in a drop in someone's credit score, it could start the ball rolling with other creditors taking actions to reduce credit limits.  All the result of what is believed to be a bad AVM value. 
Apr 23, 2008 06:18 AM
Patrick Scott
OConnor Title Guaranty, Inc. - Chicago, IL

Hi Angelo,

I am not a big fan of AVMs (Automated Valuation Model).  At the very least, the lenders should consider using a product that is reviewed by an appraiser.  For another $45.00, they can better guage the values and avoid having to freeze some of the credit lines.  It's just not right to offer an AVM value as an alternative to a real appraislal at the borrower's expense.  What happens then, a year later, when the lender is again nervous about the market in that particular neighborhood?  Do they ask the borrower to pay for yet another appraisal?

I think this is an unfortunate side effect of the consolidation of lending decisions to centralized, out-of-state locations.  I am not too young to remember the days when the loan officer at the local bank had influence over lending decisions.  The loan officer knew the borrower in many cases.  If lending decisions were still made locally, by humans, I imagine the market would have remained stable.  But even if local lending had led to the same declining market we are experiencing today, local decision-makers could consider more factors in determining whether to freeze credit lines, such as:  Does the borrower have money in another account to cover the reduction in equity?  Is it likely that the borrower will stay in the home, regardless of its reduction in value? 

I'd like to stay and chat, but I have to go and read my credit agreement.  Good post, Angelo.

Apr 23, 2008 03:40 PM
Angelo Cusinato
First Centennial Mortgage - Barrington, IL
CRMS, CMC, Mortgage Specialist NMLS # 207204
Patrick, Thanks for the comments.  It sounds like you and I share memories of the "good old days" where character was one of the key considerations in the lending process.  Too bad a medical collection or a past due parking ticket has more of an impact.  Have a great day!
Apr 24, 2008 02:49 AM