Second Mortgages: Will a Run on Home Equity Lines be the 21st Century Version of a Bank Run?

by Alex Stenback on January 31, 2008

Couple of random data points to share that support our assertion that mortgage credit standards will continue tightening throughout 2008.  From the Second (Mortgage) front:

An email from Chase (emphasis ours – notice how they are now talking about survival, rather than profitability):
"Due to continued deterioration of the market, Chase has made several changes to credit policy to secure their survival in the future. Some of these changes are reduction to CLTV’s, DTI’s and other policy changes.  Please make sure to read the attached credit policy effective on Monday 2-4.  All file registered prior to Monday 2-4 will fall under current guidelines. 

  • Property needs to be off the market for 180 days
  • No condos in Florida as collateral
  • 85% Max CLTV Primary Residence (Cltv’s vary by state)
  • DTI’s reduced to 40% for Purchases and refinance with credit scores under 700
  • Max dti allowed for 700+ fico will be 45%.
  • Additional State and County specific CLTV reductions (see chart attached)
  • Many other changes listed in the attachment.

And at Countrywide, Home Equity Credit Lines are being suspended
[via Calculated Risk, via Implode]
"A portion of HELOC customers have already or will soon be notified by CFC Loan Administration that their HELOC draws have been suspended indefinitely. These HELOCs were identified as candidates for suspensions for various reasons including:

  • Significant decrease in supporting property value – If the customer’s current untapped equity (home value minus all mortgage liens) drops by 50% or more from their HELOC opening date, his/her line will be suspended.
  • HELOC payment delinquency – If the customer’s payment is made two or more days after the grace period ends, his/her line will be suspended.
  • Product Terms/Conditions Violation – In cases where the customer violated terms or conditions of the HELOC Agreement, his/her line will be suspended.
  • Examples include, but are not limited to: HELOC on property originated as owner occupied, but now believed to be non-owner occupied or unpaid taxes or insurance on the subject property.
  • Be aware that there may be other actions that could trigger draw suspensions.

This is not a one-time event, but an on-going strategy as we continue to manage our lending risk."

Our take on this is that more than a few people will interpret this move from CW as a shot across the bow, and draw the full amount on their equity line to preserve their access to these funds. 

A run on home equity line withdrawals by cash strapped and otherwise shaky borrowers would be a disaster for banks trying to defend their balance sheet.

{ 2 comments… read them below or add one }

Chuck February 2, 2008 at 12:55 pm

I don’t think I’d say “balance sheet”, I think I’d say “solvency”.

In the event of foreclosure, the 2nd loan lender and the HELOC lender lose 100% right?

I’m surprised they’re not restricting them more…

erin go bragh August 7, 2008 at 5:40 am

Chase Bank AZ. Heloc!!!!!! We took a heloc on our home in AZ. We had an original loan of 40K the heloc amount was 170K. The value of our home has not changed neither up or down! We were told we were getting a 80/20 LTV on the loan by our bank rep. We have never ever been one day late on any payments. Our loan officer suddenly quit???? We did not find out from company until approx 10 days after our loan amount was reduced!!! It just so happened to be reduced to almost the exact amount we owed!!!! Bank loan officer quit on the day we accidentally found out what was happening…We had a few checks written on the account promised they would clear by bank VP. The president was suddenly on vacation. Our loan officer made a call to us from his cell phone as he was being fired!!!!
Checks did not get paid…However since we had heard of problem unofficially we made payments from our checking account over the phone to cover the unpaid checks. Bank Vp called to try to work our problem. We sat there listening to her explain to her company who she was as she was put on hold and eventually hung up on!!! Was told by our loan officer the appraisal originally was260K… being told it was 365K!!!
We certainly would have known that was impossible as we had just bought the home!! Never saw appraisal!!!! The bank VP after sitting for over an hour on the phone
etc. said here is a special number I am not supposed to give out maybe you can find out more that way???? Are you kidding me!!!
We were told we must get appraisal of over 365K!!!! None of their numbers even begin to add up. I was online and Chase sent an offer of Heloc to me. They realized after our online chat that we already had heloc!!!
Suddenly disconnected given number to call with a fake name!!!! That gets you to nobody…we can not get thru to anyone who has a clue!!!!! This all seems to go against federal supposed guide lines!!!!
Does anyone have any suggestions??

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