Mortgage borrowers along the Front Range are starting to receive letters freezing their existing home equity lines or reducing their lending limits because of declining home values.
The freezes prevent homeowners from tapping an important source of emergency funds, and if they expand, they could worsen the current economic slowdown, some analysts fear.
Countrywide, the nation’s largest mortgage lender, sent out 122,000 such letters, including an undisclosed number to Colorado, in the past week.
“As you know, home values in many areas of the country have declined,” the letter states. “We believe that the decline in the value of your property, from its original appraised value at the time your loan was made, is significant.”
By the time the letters landed in mailboxes, home equity lines were already frozen. Checks, credit cards or other withdrawals on lines were forbidden, according to a copy of the letter.
Washington Mutual, Chase and Wells Fargo, the largest bank in the state, are reported to be reviewing home equity line freezes or credit limit reductions on a case-by-case basis. Other lenders are expected to join them.
“Recently we have increased the frequency of these case-by-case reviews due to market conditions, and we have seen an increase in the number of borrowers affected,” said Cristie Drumm, a spokeswoman for Wells Fargo.
Borrowers likely won’t be able to easily replace the lost home equity lines, unless they can prove their home values haven’t declined, said Lou Barnes, owner of mortgage lender Boulder West Financial Services.
If they can prove that, then lenders would likely unfreeze their lines after an appeal.
Loan documents allow freezes when a home’s value has suffered a “significant” decline, but they don’t define significant.
Whether a borrower put money down or bought a home at a discounted price isn’t taken into the calculation that determined who got letters, according to a Countrywide customer service agent.
Countrywide uses an undisclosed valuation model but doesn’t accept online valuation services in an appeal. Appraisals or competitive market analyses are allowed.
Nationally, the problem could cause consumers to further tighten their spending, predicts Mike Shedlock, an investment adviser representative with Sitka Pacific Capital Management in Edmonds, Wash.
Some estimates have home equity withdrawals still running at about $600 billion a year, making them an important source of consumer disposable income.
If credit freezes knock out a quarter of that funding source this year, it could subtract enough from consumer finances to negate the $150 billion stimulus package the federal government is providing this summer, Shedlock estimates.
“The consumer is running out of options, especially at the lower end of the scale,” Barnes said.
Aldo Svaldi: 303-954-1410 or asvaldi@denverpost.com
