The Lane County homeowners thought they had money in their houses that they could tap in an emergency. They'd nailed down home equity lines of credit to use for repairs, for kitchen remodels or for a cushion in retirement.
All they needed do was say the word and the cash was theirs. Or so they thought.
But lenders - without warning - are freezing, reducing or canceling home equity lines of credit in response to a two-year decline in local property values.
SELCO Community Credit Union clipped an undisclosed number of its customers' lines with an early October letter that cited a dramatic decline in value in the local real estate market.
The letter came as a shock to SELCO member Bill Gonzalez, who has relied on his $12,000 line of credit for backup in retirement.
"That's always been my emergency fund," he said. "I only use it when there's no other source. It's really screwed things up because, if something happens, and I can't make my house payment, I could always turn to it - but I don't have that option anymore."
Over the past 2 1/2 years, the big retail banks have systematically re-evaluated local real estate markets nationwide, and where they found big declines, they cut back on their customers' credit lines.
They explained that a maxed out line would come to more than the value of the house, which was their collateral for the loan.
Cuts began two years ago
Beginning in Spring 2008, Bank of America, Citibank, JP Morgan Chase, Morgan Stanley and the now-defunct Countrywide and Washington Mutual cancelled or reduced home equity credit lines in various parts of the country, including in Oregon.
Local home values, meanwhile, continued to fall. The median price of a house in Eugene-Springfield has come down 18.5 percent since the June 2007 top of the market, according to the Regional Multiple Listing Service. (RMLS doesn't account for all new construction or houses sold by their owner.)
SELCO CEO Bob Newcomb estimates that local values have come down 20 percent. As values drop, the amount a homeowner can borrow from a home equity line of credit, and the market value of the house get closer and closer together, with the value of the house sometimes falling below the amount of the line of credit.
Nationally, about 20 percent of homeowners owe more than their house is worth and an additional 33 percent have equity of 10 percent or less of the market value of the house, Ben Bernanke, the Federal Reserve chairman said recently.
This means that if homeowners were forced to sell their house, more than half of the ones with mortgages likely wouldn't get enough to even pay off their mortgage, let alone any additional money they owe on a line of credit.
In a downturn, banks must dial down home equity lines so they are in line with the value of the property, SELCO's Newcomb said.
"It's just good prudent management is really all it is," he said. "It's a process of trying to keep those loan limits in sync with the underlying values. And with the dramatic decline in values, it's just appropriate we go back and evaluate the loan limits."
Whenever lenders reduce or cancel lines of credit, some homeowners are caught in the lurch.
In early 2008, for example, Crest Drive resident Kim Heddinger and her partner Lynell Stokes had embarked on a $200,000 kitchen and utility room remodel that she planned to finance with a two-year-old line of credit that, until then, she'd never touched.
After the rooms had been gutted down to the studs in preparation, the couple got a letter from the lender, Bank of America, telling them the line of credit was cancelled.
Heddinger, the incoming president of the Eugene Association of Realtors, had a hard time finding another bank that wanted to finance a house without a working kitchen and laundry room, she said. "I am still so upset about this," she said.
Many people across the country were reliant on home equity lines that disappeared - even though they were good customers who kept their payments current, said Cleveland attorney Jack Landskroner, who has filed a class action suit on behalf of homeowners who've been hurt by the practice.
"I've had clients that were paying their bills for cancer treatment out of their equity line," he said. "I've had clients who were in the middle of doing home reconstruction projects and had their checks bounce."
Lenders urged equity loans
Many of them borrowed from 2005 though 2007 when lenders were aggressively marketing home equity lines of credit for customers to spend on just about anything - "live richly," Citibank's campaign advised.
SELCO suggested on its website in 2006 that its customers take out a home equity line of credit to "consolidate your debt, remodel your home, pay for college tuition, take a vacation or have a new baby ..."
"Every bank in town was running ads and commercials that said: 'Use your equity line to go on vacation with your family. Get the value out of your home. You earned it. You should use it.'
"They were encouraging people to max out their equity lines, then they turn around and say 'Oh sorry, you over extended yourself,'" Landskroner said.
Home equity lines of credit became a significant source of loan activity for lenders and a critical product for many home owners, Newcomb said.
"Many consumers have used their homes like an ATM, accessing these equities as the values appreciated during the boom cycle.
"You end up with a lot of home equity lines essentially being unsecured loans now, because the line of credit exceeds the equity in the house," Newcomb said.
When lenders clip home equity lines, they often do so without telling the customer in advance, Landskroner said. That's why some homeowners first learn about their lender's action when a check bounces.
The federal Truth in Lending Act and the FDIC's supervisory guidance letters require lenders to notify customers - not later than three business days after the line is closed or reduced.
Freezing the lines before telling customers stops the homeowners from attempting to beat the freeze by taking the money out.
"The banks had no interest in giving notice to anybody, because they know had they done that, most people would have maxed out their lines and put the money in an account to earn interest," Landskroner said.
Class action suit possible
The FDIC urges financial institutions to work with borrowers, where possible, to minimize hardships that may result from frozen or reduced credit lines.
Heddinger said she is still angry about how she was treated by her bank. Bank of America didn't seem to care that she was without a kitchen or laundry room - or that she was suddenly unable to make an $80,000 payment to the remodeling contractor, she said.
"There was no working with them. That was just it. And that's where my hate of banks started right there. I just don't trust them any more. I really don't," she said.
Eventually, Umpqua Bank approved another credit line with which she could finish the remodel.
Nine homeowners from California, Illinois and Texas are challenging JP Morgan Chase on issues surrounding the cancellation of their home equity credit lines. The case was consolidated in the U.S. District Court of Northern Illinois in June - and it may become a class action suit.
"We are going to decline to comment on this issue," said Darcy Wilmot, JP Morgan Chase spokeswoman,
Federal law requires a "significant" decrease in house value before banks reign in their customer's home equity lines of credit.
The homeowners suing Chase contend that it's not enough to do a regional market analysis or use an automatic valuation calculated by a computer program.
"The banks across the board - and this includes Chase and just about every other bank that's out there - have crafted a computer model that they have relied upon and that they claim to be industry standard," Landskroner said.
Lenders have been unwilling to explain in open court how the models work. California District Judge William Alsup found it a "mystery," court records show.
The models are simply a way for banks to "cut and run" from their liabilities, Landskroner wrote in court filings.
The models don't necessarily account for value-added improvements homeowners made to the houses, and the models don't automatically figure in how much of the underlying mortgage the homeowner has paid, he said.
"In large part, from our investigation, those models are inaccurate at best. It's the tool the banks are using to get to the outcome they want to achieve," he said.
The homeowners in the lawsuit also contend that the process isn't fair because the homeowner has to pay for a full in-person appraisal when they initially take out the line of credit - and often another appraisal when they seek to contest a bank's decision to freeze their line.
But the bank has a much lower hurdle for re-assessing a houses' value when it is allowed to use an automatic valuation computer program.
The homeowners contend further that the banks continue to charge them $25, $50 or $75 in annual fees to access the credit line - even on frozen accounts.
"It's a rip-off if they won't let me use the loan," Gonzalez said. "I've never missed a payment - anywhere. My credit rating was in the high 700s. What's the point?
"If I come across some money, I'm paying that damn thing off and I'll go somewhere else. I just don't think it's right. They should handle it case by case," he said.
Banks leery of new loans
Some institutions do take a case-by-case approach. Home Federal Bank hasn't clipped any lines of credit, Chief Executive Officer Len Williams said. Home Federal Bank is successor to the failed LibertyBank and has a half-dozen branches in Eugene-Springfield.
"The loan is to the person - not to the property," he said. "It's just secured by the property, and 99 times out of 100, people live up to their obligations, continue to pay and move forward."
Century Bank takes a similar approach, CEO Tom Widmer said.
"We do monitor property values but do not actually do regular reappraisals," he said. "We really look more at the cash flow from the borrower as opposed to the value of the collateral per se."
Siuslaw Bank keeps only about $4 million of home equity lines of credit in its portfolio, Senior Vice President Mike Murphy said. The bank hasn't reduced or closed anyone's line of credit.
And the homeowners that hold the Siuslaw loans are less likely to owe more than their properties are worth, he said.
"We feel like our underwriting standards out front gave us some comfort compared with those who wrote 110 or 125 percent loan-to-value (contracts)," he said.
Home equity lines also are a tiny part of the portfolios of the regional Pacific Continental and Umpqua banks.
Pacific Continental Bank has not "taken a carte blanche across-the-board systematic approach to looking to those (values)," said Denise Ghazal, senior vice president.
In a handful of cases that came to light in other ways, the bank has reduced home equity lines, she said. "Our approach is to communicate clearly and openly with them and work out a solution that's amenable to both parties."
Today, banks are slow to open additional home equity lines of credit, said Jeff Rulis, a Portland banking industry analyst with D.A. Davidson.
"They're leery of potential problems," he said. "The tone is not looking to aggressively grow that product line - more so just maintain it and keep a watchful eye on where that product line is headed. It's a conservative approach at this time."
And lenders could shut down more of the existing lines of credit, should Eugene-Springfield's housing values slip further.
"Until we see some sort of stabilizing of values in the mortgage environment, there's always that potential," Newcomb said.