The Mortgage Modification That Hurts Borrowers
Our lender has modified our mortgage. That sounds pretty good because mortgage modifications are in the news and some people very much need new rates and terms.
But in this case, what’s happened is this: Out of the blue and without any other notice our lender has cut off our home equity line of credit (HELOC). Why? Nope, we haven’t missed a payment. It’s because our lender says the value of our property has fallen.
Committed Lender?
The letter was received yesterday, April 6th, explaining that our lender is “committed to helping customers achieve and sustain homeownership, and we’re doing everything we can to help homeowners ensure that they don’t borrow more than their home is worth.”
It should be fairly obvious that the party being helped here is the lender. If the borrower can make their payments — and we make ALL of our payments in full and on time — then just like a first mortgage there’s no issue for the lender. As the lender’s letter says, “we appreciate that you have handled your home equity loan account responsibly, and want to make sure you know that this change is occurring because of the significant decline in your property value.”
However, with a home equity line of credit the rules allow lenders to ignore payment patterns and block or reduce credit lines if there’s been a significant fall in property values. Given that home values nationwide are down 13.2 percent since April 2007 according to government figures, it’s easy for lenders to claim that equity has fallen enough to justify cutting off cheap financing.
Consumer Imbalances
So what’s wrong with this system?
First, the cut-off date was March 5th — and the letter was received April 6th. Potentially, all checks written against the account for the past month could bounce. In other words, notice arrived AFTER access to the account was cut off. You can guess how many attorneys represented borrowers when this rule was made up.
Second, you can appeal the lender’s decision by getting an appraisal at your cost from their appraiser. However, even if the property’s value is higher than the computer model used by the lender, the letter does not actually say how much equity you need to reinstate the loan. Do you need 20 percent? Thirty percent? Fifty percent? You need to know both the equity value of your home and the acceptable loan-to-value ratio. The second figure is not disclosed and can be whatever the lender wants.
Third, many people paid an up-front fee for their home equity loan based on the size of the line of credit. Obviously if the amount of credit has been reduced the cost for the line should also be lowered but you can bet that no check is in the mail.
Fourth, and lastly, you have to wonder how many lenders are reducing low-cost home equity lines of credit — while increasing limits for high-cost credit debt from the very same borrowers.
The whole point of a line of credit is to have funds instantly available in the case of an emergency and for other reasons. Otherwise, why bother? Is it any wonder that of the 10 most disliked companies in America, seven are financial giants?
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