Lenders pull back on home equity lines

Detroit Free Press (MCT) - Planning to cover the college tuition this fall by tapping into an existing home equity line of credit? You could need to turn to Plan B.

Big-name lenders are reducing or shutting off existing home equity lines of credit. One of the latest moves was by Morgan Stanley.

Lenders are taking action in some cases because borrowers don't have a reasonable shot at repaying all that money since the home isn't worth all that much anymore.

The home equity crunch hurts consumers and consumer-driven companies, such as Detroit's automakers.

Art Spinella, president of CNW Research in Bandon, Ore., said new car sales are likely to continue to struggle in some states because some home equity lines have been trimmed or reduced to nothing. He noted that one-third of new vehicle sales in California were made with the use of a home equity line of credit.

This month, Morgan Stanley, the second-largest U.S. securities firm, told thousands of homeowners elsewhere that it would unilaterally close their home equity lines of credit.

The letter stated: "Our recent review showed that your home value has declined significantly since the time you opened your HELOC." Some homeowners had barely tapped into their existing lines. Consumers are required to continue to pay at least the minimum payment due, if any, each month.

Some homeowners did say they were later told they'd be given a chance to appeal through a "walk-by reappraisal" within 30 days.

Christine Pollack, a Morgan Stanley spokeswoman in Purchase, N.Y., declined to comment last month on the home equity changes.

Even if you haven't received notice of a change yet, you cannot be certain that you won't later be told that you can no longer borrow up to the limit.

Chase began reducing or freezing existing home equity lines of credit nationwide in March. More than 150,000 Chase customers saw changes in their home equity lines. The changes affect less than 20 percent of Chase's home equity customers.

Tom Kelly, a spokesman for Chase in Chicago, said Chase is using an automated system to review current home values and compare those values with credit lines that had been extended earlier when home values in many markets were higher.

"We're trying to protect both them and us from owing more than the house is worth," Kelly said.

Kelly said last month that such reviews are taking place monthly.

National City Corp. said it may be notifying borrowers that access to further credit on their line has been suspended because of a significant decline in the home's value or a decline in the borrower's credit score.

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"We're facing an unprecedented time in the housing industry, and we believe it's prudent to assess and address risks that arise due to significant changes that have occurred since the original line of credit was extended," said Bill Eiler, a spokesman for National City.

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(Susan Tompor is the personal finance columnist for the Detroit Free Press. She can be reached at stompor@freepress.com.)

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