Equity borrowing capacity declining with home values

About 6,000 homeowners received a letter recently from First American Bank in Elk Grove Village that said their home equity lines of credit would be reduced because their homes have depreciated.

If you got one of those letters, count yourself among thousands nationwide facing the grim reality that your home isn't worth even what you expected. And you now have hard choices that you won't like, either, experts say.

You could either continue with the smaller line of credit, or hire an independent appraiser and shell out a $250 to $400 fee. That's hard for whipsawed consumers to take, even in the so-called waning days of the recession.

"If you're close to maxing out (the line) or you're using the money to manage a business or expenses you can't manage to do otherwise, then you should go for an additional appraisal," said Barry Zigas, director of housing policy for Washington, D.C.-based Consumer Federation of America. "But the bank's appraisal is probably very close to what it should be."

Nationwide, banks have been sending similar letters since at least 2008, when the housing crisis and the recession caused home values to plummet and banks were under pressure to readjust how they did business or face closure themselves.

Home equity lines of credit are a form of secured credit tied to the value of property. Under common contract terms, lenders are authorized to reduce credit limits on the account or suspend further advances when the equity securing that credit declines, experts explain.

"If we can help them avoid a diaster, we will," said First American Bank CEO John Ward.

This was First American's third round of annual letters involving the reduction of home equity lines due to home depreciation. The bank started sending such letters in 2008.

The First American letter offers homeowners the option to pay a $250 flat fee that goes to the appraiser if they want to challenge the bank's appraisal. That fee was negotiated by the bank with independent appraisers to provide some relief from a process that could be costly, depending on the size of the home and other factors. Otherwise, the appraiser's fee could cost $300 or more, Ward said.

As for borrowers who may exceed the new limit, the bank will work with them to either structure a way to comfortably reduce the debt or, in most cases, leave their line as is. They then have no availability on the line, Ward said.

"Our approach to this is to try to provide a reasonable, sensitive and individualized approach to each borrower's circumstances," Ward said. "The dramatic decline in home prices has caused all of us, individuals and financial institutions alike, significant issues and First American's approach has been to try to structure solutions that allow our borrowers to get through this with a minimum of upheaval."

Chase Bank also has reviewed home values during the last two years for customers who used their homes for equity lines of credit.

"We alerted customers if we determined it was appropriate to reduce and/or freeze their equity line, because we wanted to help them avoid owing more than the house is worth," said Chase spokesman Thomas A. Kelly.

Chase and First American both offer to reinstate the line if the additional appraisal indicates the line should be unfrozen or increased. Both banks also said they would reimburse the appraiser's fee if the bank was wrong in its own appraisal.

Bank of America defends the practice of reducing such credit, even during such a tough economic time.

"While we understand the suspension of (home equity line) advances may represent a temporary hardship for customers, in today's environment, it is a responsible practice necessary to mitigate the effect of home value declines on the homeowners, the bank and the mortgage investors," said Bank of America spokesman Jumana Bauwens.

And state and federal regulators want banks to do just that. Tightening the reigns on borrowing is necessary now after foreclosures and other factors forced us into a recession, experts say.

The Illinois Department of Finance and Professional Regulation said the First American letter, like those from other banks, is common these days. But some consumers may confuse the bank's appraisal with an assessment from their county government that they may have received just months before.

The assessed value uses a different formula than the appraised value of a home. The bank wants today's market appraisal, which is based on similar home sales and foreclosures in your area. County assessors may base their decisions differently. In Cook, for example, assessors use a formula based on a three-year rolling average of home values for taxing purposes, said agency spokeswoman Susan Hofer.

Still, it's all a lot for consumers to take, said Zigas.

"If you don't need the extra line of credit, you don't need to do the extra appraisal," he said.