Countrywide“It is only the poor who pay cash, and that not from virtue, but because they are refused credit.” – Anatole France

I’ve always kept a home equity line of credit (HELOC) on our house in Newport. Jeanine and I never access it. It’s there for catastrophic reasons (the HELOC would buy us more time to weather a major financial emergency). Over thirty percent of our home’s value is buffered in equity and the HELOC gives us access to about half of this value if we ever need it. Our first mortgage on the property is a 7 year fixed interest only. I’ve never stayed in a house longer than 3 years so despite what people think of ARM products, they’re a great alternative if used responsibly. It drives down our monthly payment and the mortgage interest deduction at tax time is significant.

I’ve used this same strategy on my rental properties, keeping equity lines open but paid off. However, with these properties the first mortgages are of the 30 year fixed variety. I’m paying down principal every month. I used one equity line this summer to do some improvements and then to carry the mortgage while I was trying to get it re-rented. It is now paid off again and all three properties are currently leased.

I give this background to demonstrate that I’ve been a prudent borrower and resourceful real estate investor. So it came as a surprise this week when I got a letter from Countrywide about the HELOC on one of my properties in Phoenix indicating this:

Important message about your loan: At Countrywide Home Loans we are committed to helping customers sustain homeownership. As part of the commitment, and in keeping with its sound risk-management and responsible lending practices, Countrywide Home Loan is reviewing and analyzing home equity lines of credit in its servicing portfolio.

As you know, home values in many areas of the country have declined. 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. In accordance with the terms of your Home Equity Credit Line Agreement and Disclosure Statement (Agreement), we have elected to suspend further draws against your account as of the Effective Date above.

What this means for you: You will no longer be able to draw on the line. Blah, blah, blah…

You get the gist. I was annoyed. I would never have parked my cash there (meaning pay off this particular equity line) had I known I would not have access to the money. I had no idea that they could do this. Did you?

Apparently, I’m not alone. On Friday, the Los Angeles Times reported that Countrywide notified many homeowners they’ve lost their right to borrow against their credit lines:

Tens of thousands of homeowners with home equity lines of credit are getting a rude surprise: They’ve been told by their lender that they can no longer take money out on their credit lines because sinking home prices have left them with little or no equity.

Among the lenders taking such action is Countrywide Financial Corp., which sent 122,000 letters to customers last week telling them they could no longer borrow against their credit lines. In some cases, according to the company, the borrowers are now “upside down” — the total debt on the home exceeds the market value of the property.

Calabasas-based Countrywide, the nation’s largest mortgage lender, says it uses computer modeling that factors in changes in home prices to determine which customers will have their money tap shut off. The cutoffs are coming as a shock to some.

Hello!? I immediately called Countrywide (the lender that doesn’t like lesbians) and when I argued that I’ve been a good customer for years, the customer service representative politely indicated the change was made simply because my home’s value had declined.

That part is true… this particular house has declined in value by about 20 percent. The other two rental properties were purchased long before the bump in market appreciation so I have considerable equity in those properties. But even with the decline in value with this one, my intent and strategy was to buy and hold so I didn’t think fluctuation in market value mattered. Until now.

Of course, they have the right to do this and it’s spelled out in the fine print. They outlined it for my convenience via the Q&A in the notification letter:

Q: How is Countrywide Home Loans permitted to temporarily suspend my ability to draw on my line of credit? Where in my contract does it state that Countrywide Home Loans has the right to refuse to make any additional loans to me?

A: In your contract, which has the heading Home Equity Credit Line Agreement and Disclosure Statement (“Agreement”) you will find that you have agreed that we may take this action. Please look for this in your Agreement under the paragraph heading that reads: “Your Rights to Temporarily Suspend My Loans or Reduce My Credit Limit”.

If I had known they had the right to suspend my line of credit then I would have maxed out the line and put the cash in savings until the market came back. It’s too late now. Here’s the other thing… had I known this, then I would have never paid for the HELOC in the first place, but would have just put down an additional 10% on my first mortgage. The HELOC costs money – off hand I don’t know the exact amount, but fair to assume the fee was at least a couple thousand dollars. In my mind, this was money well spent… I’m obviously not alone. The article in the Los Angeles Times continues:

“We didn’t deserve this,” Thaleia Georgiades, a real estate agent in El Dorado, Calif., said Thursday, two days after she and her husband, a builder, learned that their Countrywide credit line had been frozen.

“When you are self-employed, that’s the money you count on to bridge the gap during tough times. And this is a particularly tough time in both the building and housing industries,” Georgiades said.

I understand and can appreciate that this is an especially risky time for lenders. But I’m a good customer and feel I’m being penalized because other homeowners are at a higher risk for foreclosure. I’m not the typical borrower using my home as an ATM – colorfully described by this commenter on the Los Angeles Times blog:

Sorry, cannot complete the transaction at this time due to insufficient funds. The ATM then sucks up your card and advises you to speak to an agent.

Instead of using my HELOC as an ATM, I was using it as a savings account. Unfortunately, there’s nothing I can do about it now. Has this happened to anyone else?