Gordon Switzer, a plumbing and heating business owner in Stoneham, had his $180,000 line of credit from Citibank cut to $10,000. The bank cited declining home values for the decision despite that fact that Switzer says he’s never missed a payment.
Earlier this month, Stoneham resident Gordon Switzer got an unwelcome letter from his bank.
“It said that property values in our area have declined, and therefore they are readjusting their home equity lines,” said Switzer, a plumbing and heating company owner and landlord. He has used a Citibank line of credit on his home for improvements to his own property and the six others he owns.
Switzer, who claims he has a credit score over 800, said Citibank reduced his $180,000 home equity line of credit to $10,000, despite the fact that he’s been paying it off “religiously” since he got it two or three years ago.
“It’s ridiculous,” he said. “Obviously, that letter was sent out indiscriminately.”
Switzer is appealing the decision to Citibank, but Newton psychotherapist Joann Zelken said she burned the letter she received, which told her that the $100,000 line of credit she’s had on her condominium for 10 years had been frozen.
“They said, ‘You are an excellent customer, but [we’re freezing the line] because of home values decreasing,'” she said.
Zelken said she’s used her HELOC in place of a credit card for out-of-the-ordinary spending needs such as camp for her 9-year-old son.
“It has kept me afloat as a single mom,” she noted. The reason she used it instead of a credit card was because the interest rates were much lower.
Now, she says, she’ll never use Citibank – or any HELOC – again.
Switzer and Zelken, both customers of Amerihome Mortgage in Burlington, are part of a new class of real estate borrowers – current homeowners – who are the latest to be affected by the amorphous “declining market” designation that’s descended upon much of Massachusetts in recent months.
“What a declining market is, is very arbitrary,” said Brian Driscoll, a mortgage planner at Amerihome.
The start of declining home values can be traced to the subprime lending boom of the past several years, according to Bruce McClary, a corporate trainer at Clearpoint Financial Solutions, a nonprofit credit counseling agency in Virginia. When many unsustainable subprime loans foreclosed, lenders reacted by tightening credit standards, resulting in a “crunch” that reduced the number of available borrowers, even as the supply of homes has remained constant.
Real estate lending industry policies triggered by “declining markets” soon followed, affecting would-be borrowers of mortgage loans backed by government-sponsored enterprises Fannie Mae and Freddie Mac, as well as those needing private mortgage insurance from major national carriers. All will have to come up with higher down payments until the market is no longer “declining.” (MassHousing’s mortgage insurance plan, MI-Plus, is a local exception, lenders say).
Industry members, including HELOC lenders, say they have no official definition of “declining.”
Driscoll said homeowners in Florida and California, where values rose higher as subprime lending boomed but since have fallen harder, started seeing their HELOCs frozen early this year.
The trend popped up in Massachusetts just last month, he said.
Earlier this month, Driscoll told HELOC customers for whom Amerihome arranged loans that their lenders have the right to suspend or reduce lines of credit if the customer’s property value fell below the appraised value used to originate a loan.
“Lenders are actively assessing properties and then suspending access for account holders who have seen a downward slide in their home value,” he wrote.
Previously, HELOC withdrawals were frozen only for reasons such as bankruptcy, declining credit and payment problems, he said.
Carol Kaplan, director of public relations for the Washington, D.C.-based American Bankers Association, has noted that HELOCs have a very low delinquency rate. Today, she said, less than 1 percent nationally are more than 30 days overdue.
Kaplan added, however, that delinquencies are still at their highest rate in more than a decade.
‘Standard Practice’
Declining markets are sometimes defined as those in which home values have declined by a cumulative 1 percent or more over two quarters.
But Zelken and Switzer said their own homes’ values have remained constant.
“Joann is in a prime location, and she doesn’t have a drop [in price],” said Julianne Nichols, the Amerihome loan officer who got Zelken her mortgage loan.
Switzer said he’s put $100,000 in improvements into his home since he bought it in 2003.
It’s hard to say how many homeowners are affected by new HELOC policies. National and local banking trade associations and the state Division of Banks don’t track the number of Massachusetts borrowers with home equity loans.
But the number is likely significant. According to the Washington, D.C.-based Mortgage Bankers Association, 64 percent of second mortgages originated in the first half of 2007 were HELOCs. Meanwhile, data from the federal Home Mortgage Disclosure Act show that in 2006 – the most recent year for which information is available – 79,277 Massachusetts borrowers took out second-lien mortgages, and 1,476 took out third-lien loans. Those numbers represent 27.6 percent of all Massachusetts mortgage originations that year, said Kris Gerardi, an economist at the Federal Reserve Bank of Boston, while noting that HMDA data provide a slightly less-than-complete picture.
Virtually all HELOCs are second as opposed to first mortgages, industry observers say.
Zelken said a Citi customer service representative told her the bank sent 60,000 letters similar to hers across Massachusetts.
A Citi spokesman wouldn’t confirm the figure but said the bank regularly monitors all customer HELOCs, and reduces or suspends customers’ credit “when we identify significant deterioration in his/her credit and/or significant deterioration in the value of the home.”
The idea is to protect customers from borrowing more than the value of their properties, he added, noting that’s “standard industry practice.”
In an April 14 e-mail, Citi informed Amerihome Mortgage that it had “reviewed certain existing HELOCs in light of recent real estate market conditions,” and decided to limit further draws on those loans.
Both Citi and Wells Fargo, another national lender that has increased its reviews of HELOCs recently, have appeals processes in place for customers who believe an error has been made, they said.
Countrywide and JP Morgan Chase also have been reviewing HELOCs more aggressively, Driscoll said.
Lenders aren’t just reviewing HELOCs more aggressively – they’re also making them harder to get, McClary said.
“We’ve seen people who before would have been welcomed with open arms getting turned down,” he said.
That’s the case at Rockland Trust, a $2.7 billion South Shore bank that hasn’t considered freezing customer lines of credit, but has made it harder for customers to get a HELOC from the bank.
“We have tightened our credit standards,” said Vice President and Regional Manager for Residential Lending Steven Borgeson. HELOC candidates used to have to present a credit score of 620 to get a HELOC; now, 640 is the lowest score, though it’s much higher if a borrower wants access to the maximum 89.9 percent of equity offered by Rockland Trust.
Borgeson said he believes Citi and Wells Fargo are tightening their belts because of recent losses in the subprime market.
“They can’t take any more losses, is basically what they are saying,” he noted.
But Massachusetts Bankers Association Chief Operating Officer Kevin Kiley said lenders reducing HELOCs probably are looking at the market in general.
“They have to be very sensitive to Â… advancing credit on a declining asset,” he said. “At the end of the day, a bank has to make a judgment in a sound manner.”
Switzer said banks might find themselves losing customers at the expense of that strategy.
“What are you accomplishing by sending out a letter like that?” he asked. “You are only going to alienate people, and they’ll go elsewhere.”
