The major driver of the U.S. economy over the past five years, Home Equity Lines of Credit (HELOC's), are now on the verge of extinction as they are being suspended across the board by banks. Nice to see that JPM quietly sent out 40,000 suspension letters recently while simultaneously stating that the worst of the credit crisis was over.

Also, S&P just downgraded $34 billion worth of Alt-A mortgage bonds. These are the ones that supposedly were much more secure than subprime mortgage bonds, with the key word being "supposedly". This will ensure another round of major bank write-offs over the next few quarters. Those level III assets will soon be bulging at the seams!

Regards - VHF

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Banks freeze home equity lines as home values fall

While the practice started a few months ago in other parts of the country, it's just now hitting Northeast Ohio as banks from Fifth Third to Chase to AmTrust reduce their exposure to over-leveraged consumers. Most banks that haven't yet frozen home equity lines are looking at doing so.

"Tightening makes sense," said banking analyst Jeff Davis of Nashville, Tenn. "My estimate is that two-thirds of consumers have been using their homes like an ATM with the full blessing of their banks.

"Banks have been dumb enough to allow it, and consumers have been dumb enough to do it," said Davis, who is with FTN Midwest Research. "Now the banks are tightening up."

The credit line freezes, however, are taking a lot of consumers by surprise.

Jeannette McCarthy of Bedford always took comfort that she had somewhere to turn in case she lost her job or had an emergency: She and husband Harold Heater had $10,000 available from their home equity line.

Now, however, AmTrust Bank of Cleveland has suspended the equity line, even though she's a 15-year customer of the bank and has owned her home for about as long.

Further, even if she had been using all of her equity line, the value of her house, according to the county, still exceeded the amount of her loans by nearly $20,000.

"They took away my emotional security blanket," said McCarthy, 63, a health educator and registered nurse. "I'm angry."

Her anger is directed at AmTrust, although the bank is just one of a growing number that are freezing equity lines locally.

Those that haven't done it already will certainly be keeping an eye on certain segments of their customers.

In Northeast Ohio, home prices fell by nearly 7 percent from 2005 to 2007, according to the recorder's offices in the seven-county region. The declines are most dramatic in Cuyahoga County, where prices dropped 26 percent -- 11 percent in areas outside Cleveland.

The mounting restrictions come when equity lines are really cheap money, with interest rates of about 5 percent, down from 8.25 percent a year ago.

Since equity lines are tax-deductible, the cost of money is closer to 4 percent for most consumers today, compared with credit card rates averaging 13 percent.

AmTrust spokeswoman Donna Winfield said the bank's move to freeze equity lines here "was across the board" in areas where property values have declined and among customers who had less equity left.

"We're looking at it from a standard of responsible lending and trying to protect ourselves and our customers," she said.

Winfield said that the home value data was provided by an outside firm but that homeowners are encouraged to appeal if they question the numbers.

McCarthy questions her freeze. Her house, according to the Cuyahoga County treasurer's office, is worth more than $107,000 for tax purposes. She owes about $64,000 on her first mortgage and $15,000 on her equity line.

If she had been using the additional $10,000 available on her line, that would have put her at $89,000 owed, leaving a buffer of more than $18,000 in case the home value declined.

"I had no intention of using it," she said. "I just knew it was there if I needed it."

McCarthy was notified by letter after the account was suspended.

Customers of other banks are finding out the same news.

JPMorgan Chase in recent weeks sent out some 40,000 letters to customers nationwide, including those in Northeast Ohio. Spokesman Tom Kelly said that he didn't know what percentage of equity line customers that represented but that the freeze applies only to customers who don't have much equity left after declining home values are taken into account.