Citibank Freezes Home Equity Lines of Credit
‘œRemember that credit is money.’ ‘“ Benjamin Franklin
As many readers know, I’m a proponent of keeping an untapped home equity line of credit (HELOC) at my disposal for major emergencies. This isn’t my emergency fund. It’s what I call my catastrophe fund.
I’ve always believed that keeping a HELOC readily available is the best insurance policy and the back-up plan for if / when the emergency fund runs empty. Think about it’¦ being able to tap this money could buy us time in the event of long term job loss or illness. And time is money.
When we bought our home three years ago, we put $300,000 down on the $1,100,000 purchase price. This was well over 25 percent of its value and considered reasonable in the era of zero-down loans. This amount gave us a nice chunk of equity in our house. I actually wanted to put more down, but our mortgage broker suggested otherwise. Her advice was that we could be doing smarter things with this money’¦ as in buying additional assets (cash positive rental properties, etc.) or other long term investments.
Immediately after we bought the house, our mortgage broker had us refinance and get a line of credit from Citibank for $168,000. We have never used it.
Of course the temptation is always there. We’ve wanted to remodel our kitchen since day one, but Jeanine and I agreed we’d wait and pay cash for this project (estimated at $45,000). Our cash went to other projects last year’¦ specifically the $55,000 spent trying to make a baby. This year, it will be another $25,000 – $30,000 to adopt a baby. We’ll be living with the old kitchen for awhile.
I list all the financial details to support my belief that we’re responsible borrowers. The HELOC is there strictly as a backup plan. For a catastrophe. Period. End of story. But with that said, I’ve always looked at that line of credit as my money. Money I could access at any time.
Last month, I wrote about how Countrywide suspended the HELOC on one of my rental properties and there were more than a few interesting comments I agreed with:
Countrywide got paid to open the account, paid religiously on my mortgage and the equity line and even got my money before I would have been contractually required to pay it. I, on the other hand, have sacrificed the opportunity to choose how to spend my money, given up a financial cushion, and will now need to completely rethink my financial planning. I feel like a chump!
Another person wrote:
But, the bigger problem as I see it is that Countrywide (and any other lender for that matter) believes they can freeze equity lines at will with no supporting documentation of a property’s decline in value.
I’m not arguing with the fact that the underlying collateral of a HELOC is the home and therefore the bank has the right (so clearly stated in the fine print) to suspend access to these funds. Live and learn. My rental property in Phoenix with the Countrywide loan did in fact decrease in value. This depreciation doesn’t matter considering I’m investing in real estate for the long haul. I’ve always purchased with the buy and hold strategy. Except for that little venture into fixing and flipping a few years back. That was the flip that flopped. Live and learn.
Aside from that, I’ve done most things right and for forty, I’m in a good place financially. I’ve always considered my primary residence to be one of my most solid investments. So it came as a surprise yesterday when we got the letter from Citibank about our $168,000 line of credit:
We have determined that home values in your area, including your home value, have significantly declined. As a result of this decline, your home’s value no longer supports the current credit limit for your home equity line of credit. Therefore, we are reducing the credit limit for your home equity line of credit, effective March 18, 2008, to $10,000. Our reduction of your credit limit is authorized by your line of credit agreement, federal law and regulatory guidelines.
Reduced to $10,000!? Hello!? Please don’t f-ck with my house in Newport Beach’¦
Of course, I’m calling them today to dispute it. Why? Because unlike the Phoenix property, I believe I can prove our home has retained its value and hasn’t declined. We have a Newport Beach address but live in what I’d describe as the low rent district of the city. It’s on the cusp of Eastside Costa Mesa and I believe the lender is using comps from Costa Mesa for comparison.
One reason why we bought in Newport is because we believed that property values would retain their value over time. After all, how many of you have heard of Costa Mesa? But most people have heard of Newport Beach. It’s considered desirable. People want the Newport Beach address. As real estate declines, it will decline more quickly in Costa Mesa. And it is.
But Newport hasn’t declined with any significance and if we compare current comps in our zip code, we can prove to the lender that our home has retained its value. Or so that’s my plan. I’m going to fight this one and I’ll write a follow up post about my success or failure with regards to the dispute.
In the meantime, this is what others are saying in some of the forums:
Over in the mortgage threads, there is much discussion of lenders restricting credit, even for prime borrowers. One of my FIRE plans has been to invest in tax advantaged accounts and pay off my mortgage and at the same time keep a HELOC for a possible source of emergency funds should it ever be needed. Is this still a viable plan, if the bank may unilaterally change the agreement? By keeping a relatively small emergency fund in cash, I feel like I am putting my money to work elsewhere, yet still have the HELOC to fall back on should a big emergency arise. What I am reading now seems to say this is riskier than I thought if the bank might refuse to extend funds as they previously agreed.
If this is real problem, then perhaps I should divert any money now paying off the mortgage into a larger cash emergency fund, in which case maybe the HELOC isn’t needed at all. I am reluctant to devote new cash to this, when it seems the HELOC really should be doing this job, but can I really count on the HELOC. I never heard of banks refusing to extend credit under an agreement they had already made, but people do seem to be reporting that happening.
I can see it would be safer to accumulate the savings. But what are the chances I really need that much safety? Is it becoming common for banks to withhold HELOC?
Here’s another perspective:
I view a HELOC as just one of several liquidity alternatives that I generally have lined up at any given time. Usually have a chunk of cash, some CDs I could break, untapped credit cards, margin loan availability, and the HELOC. If the commode hits the windmill, at least some of these options could be tapped.
So what do you think about all this mortgage talk? I’d love your thoughts below.
Additional reading:
Lenders Rethink Home-Equity Loans at The Wall Street Journal
Homeowners Losing Equity Lines at WashingtonPost.com
Ah, bankers. They get to make the rules of the game. And if something icky happens and the game isn’t going their way, they then get to change the rules. After that, if they’re still taking on water, they send lobbyists to Capitol Hill to gladhand and “stress the gravity” of the situation. Encourage positive government participation, if you will.
Speaking as a guy who has maybe 50% or better equity in a (very) modest home, I gotta say that HELOCs rest just a notch above credit cards in my book. We’ve never had a HELOC, nor the desire for one. In the future? Who knows.
But personally, I’ve found that my stress levels are minimal so long as I rely on bankers’ “help” as little as possible.
Nina, there is a seemingly endless parade of homeowners who think that their HELOC “will be there for them” if something bad happens. Home values drop, banks reduce (or even call) the credit lines, and chaos ensues. CNN and the NYT come calling.
Given current newslines, I’m afraid that more and more homeloaners are in for a nasty surprise. The bank’s goal, as I’ve so often heard, is to lend you an umbrella — provided you don’t need it. Once the skies cloud up, the horizon darkens, and water starts spattering the windshield, all bets are off. The banks want their umbrella back.
Welcome to The Game. I’m afraid we’re all gonna have front-row seats for this one.
It might be that property values haven’t declined that much in your area, but all the banks are trying to reduce their exposure to risk and if they did have to sell your house it would probably take them much longer and get a lower price and even if not they want to cut their potential exposures from people taking up outstanding credit lines. It’s an unfortunate impact of the credit crisis. It’s like stockbrokers raising margin requirements when there is higher volatility in the stock market. You as an investor might be doing fine, but others are not and they want to reduce their risk.
HELOCs are a financial tool. They can be used to an advantage or disadvantage depending on your situation. Unfortunately, it’s one that is being taken away due to the banking and real estate problems and there are sure to be more pullback as banks suffer more losses…
Citibank decreased my equity line too. What is outrageous is that
1- they used some bogus computer program to calculate the decrease
2- this bogus program established a decrease WAY higher than currently available data for my zipcode or city (double the percentage)
3- They do not disclose the criteria they used (new loan-to-value for example)
4- I have to pay for an appraisal to appeal and prove them wrong
5- They are not willing to disclose the criteria they would use to evaluate the appeal. That is, even if my appraisal comes higher, they might do nothing about it
This is not adjusting to the market, this is betraying the costumer! BEWARE OF CITIBANK
It gets even better. The loan “suspensions” are trashing our credit scores. So even though we paid our payments PERFECTLY this suspension is listed as a “major derogatory” on our credit reports. Citibank admits this is wrong but will not fix it. When Citi took my loan available to 0, it lowered our scores even more than the “loan is suspended.” Trashing people with good credit is WRONG, WRONG, WRONG!!!
This economy is a bad situation for the people who cannot afford the rising payments of their ARM’s resetting. Naturally we are in the process of applying for financing for our new home and our scores being lowered is a real problem. (By the way it is home we can afford and have 20% down payment.)
Barbara: I didn’t know this would have any impact on credit scores. Thanks for the heads up… I’m going to find out if this is the case for us.
Nina-
I wish I had read your blog on the day you posted it! I just found my WAMU equityline has been slashed 70% this morning!
I feel enraged as you do. I checked Zillow and yes my home has dropped 15% in value but WAMU claims homes in the area have dropped 40%. They use “a general valuation doftware program” according to a manger I spoke with.
Anyway, I know Zillow is not as good as an actual full appraisal but I feel like I have been accused of being financially incompetent just because others may have been.
My FICO score is 840 or better and I have never missed a payment.
If they trat their good SOLVENT customers this way then they will see an exodus of the better customers and be left with the ones who can’t pay.
As to all of you who grous and throw stones at Nina, you are better off not saving any money and borrowing as much you can, buy gold,and later pay off your loans with drastically cheaper dollars reduced in value thanks to Bernanke.
Thank you again for your blog Nina- cheers!
I also say Cheers! to Nina… I don’t particularly agree with HLOC suspensions, but I can partially understand their reasons, (when legitimate). What I don’t agree with is the method of the suspension. Shouldn’t it be illegal to freeze funds without the borrowers knowledge causing one to expend funds that aren’t there. Isn’t that called bad check writing. Well that’s essentially what I’ve done. Maybe we can refer the lenders to the District Attorney’s office to force them to honor the funds. The effective date of the suspension MUST also be regulated by law.
Nina,
Same thing happened to me. I have a studio condo in the wealthiest area of Chicago. I have been paying down my line of credit with all of my extra cash. I got the same letter you got about a week ago. Citi appraised my place at 200K by looking at a real estate automated valuation system. The customer service rep at Citibank told me they used Google to value my home. I pulled some recently sold listings and found my place was worth $280K to $300K. I am sending them the comps tomorrow to see if they will increase my line to where it was. If not, all my extra cash will just go in my bank. No point in paying down my line further just so they can lower the amount available again.
The only satisfaction I have is knowing that Citi posted a $5 billion loss in Q1 2008. Too bad most of the losers they loan money to have caused this, so they are punishing their good customers like you and me.
Citibank is not using any model to value your home when reducing your credit lines on your HELOCs. They are simply backing their way to your current balance and freezing you there. They have clearly chosen to exit the home equity business. I have dozens of clients this has happened to. Regardless of LTV everyone seems to be lowered to their current balance. I hope there’s a smart lawyer out this who takes this class action. Damage is done. Not only are my clients credit scores being lowered because overnight they are all suddenly at or above their limit on the home equity lines. This WILL reduce their FICO scores.
Not only do they give you “value babble” on the phone when you call them but they are unwilling to over ride the $541 early cancelation fee. So even if you want to pay them off and go to a bank that still wants to be in the home equity business they hold you hostage with the early termination agreement.
Where’s a good lawyer when you need one?
I don’t care what you all say. Citibank is doing this because the interest rates are down and they’re not making as much money as they were a year ago. Why didn’t they do this a year ago? Because the interest rates were high and they were raking it in. Now, that the market has turned away from their favor, they’re screwing us. Citibank has nearly eliminated my ability to fund my business.
I also think it’s funny that the only appraisals they’ll accept is from Lending Services, Inc. Can you say KICKBACKS?
Citi is violating the terms of the Equity Line of Credit Agreement. It states that Citi can reduce the line of credit if “the value of property declines significantly.” There are many areas, mine included, where homes have held their value. However, when I made a huge pay-down of $82,000 recently, Citi immediately cut my line to the remaining balance. Therefore, it is clear that this has nothing to do with the value of my home. Sorry, Citi, but you don’t get to change the terms! I’m looking for an attorney to handle a class-action suit.
It’s not just Citibank. Yesterday (5/19/08) I received a letter from Chase Bank reducing my HELOC limit to just above my outstanding balance. This line was just increased last year after an appraisal by Chase. Now they claim my home (waterfront — western NY) has decreased in value by 25%. Bull. Waterfront property is still going up around here. Now I have to hire an appraiser on my own dime and try to get the credit restored, or I can apply for another HELOC elsewhere and buy out Chase. I’m thinking of going with the latter course, as I think Chase has acted in violation of the agreement unless they can document the purported reduction in value. They won’t when you call them, and they can’t because the value has not decreased. They are playing CYA.
FYI, Citibank has also extended this to their credit cards. Despite the fact I have been a very long term customer and have always paid on time and my balance on the mid 5 figure line was paid off in full every month, I received a notice saying that my 5 figure credit line had been reduced to $500 due to increased risk or something like that.
I am glad I had the hind sight to pull cash out of my HELOCs.
This is why the economy and home prices are nosediving. If you pay religiously and have tens/hundreds of thousands of credit availability pulled out from you. Imagine what those with less than perfect records are having to deal with.
Well, I had kept my HELOC from Chase in the past two years almost drawn to the maximum, while invested it and was getting income on it in Europe – where I’m originally from – in Euros. I don’t need to tell you what happened to the EUR/USD exchange rate + interest rates in the past 2-3 years. It just seemed a no-brainer in my case with government guarantee icing on top of the Euro cake. I have ALWAYS paid all my bills including the HELOC on time and have a strong credit score, proven income of 100-130K. I just got 40k back and just could not resist the penny-pinching temptation to pay it temporarily towards the line to save on interest charged. WHAM! Got the letter in the mail within days about a freeze taking effect a date before(!) you even had a chance to read it. Good timing here at J.P.Morgan-Chase! I guess, they were watching and waiting in my account for such an event to hopefully take place. Now, some of my checks already issued will bounce, my credit going to take a hit and probably going to cost quite a few rapidly-depreciating dollars in BS bank charges. If I dispute, they might even have the nerve to tell me that “You know, you don’t seem to be such a good risk lately. You appear to be bouncing checks with several accounts of yours recently!†after them causing the situation in the first place.
I thought we had a contract!
It just further reinforces my inherent, European, suspicious-genes, “do not trust government or big businessâ€. I let my guard down. Fooled me once, shame on you…
Carefully, look overseas for opportunities. This is not a really business-friendly climate now, not even tax-wise, given the fact that my “Old Country†now charges a top 19% flat income tax rate, virtually no exemptions, simplified book keeping etc.
Regards,
Winston
I just had to shovel out extra cash to ship all the windows back that were already delivered and we were about to have them installed. (Heating oil is not that cheap either and these single glazed windows should really go.)
Funny thing, I just dropped a check in the mail at the post office to the contractor 15-20 minutes before I got and read the “Burn Notice†from Chase. Thanks God, it’s a small community here and the Postal Lady knows me on a first name basis, because I had to drive down there in a mad dash and ask her to allow me to dive in the mailbox to retrieve my mail with the check in it from there. She was really nice and she did let me go through all that mail and retrieve the one I put in there. I’m quite sure she broke quite a few rules to do a favor for me but at least this is 5k less that is bouncing back unpaid. I’m still awaiting the final tally of bounced check fees and immediately raised interest rates and the like. The funny part will be if even chase will be trying to collect unpaid check fees on the HELOC that they have caused to bounce in the first place. In may case the HELOC suspended effective date of 7/8/08 letter got to my hands 7/10/08. REALLY sharp timing. Maybe, the post office and Postal Ladies did some favors for Chase too in timing these notices.
With that said, the supplier of these windows is out of a sale, the Contractor I hired is out of a job. Is that what they call “Trickle Down Economics†these days?
I have a gut feeling this one is not going to turn out pretty Folks. The feeling is based on the years of experience with inflation and its effects on the general population that I have witnessed while working for a couple of years in the countries of the former Easter Block. Thanks God, I was paid a Westerner’s wages in hard currency, so I had actually benefited there. But the locals, Boy! They were devastated. As I see it in this case, not even the Mighty US Dollar qualifies as hard currency anymore.
There is one thing that none of the detractors here have addressed: What is the justification of the HELOC lender to decrease their valuation WITHOUT AN APPRAISAL?
Citibank is REQUIRING HELOC holders to use a special third party service to find appraisers (at $575 for a $500k valuation) so the holder can justify why the reduction in HELOC limit is not supported.
Do you see the inequity here? They arbitrarily pull the plug, and the burden is only on the homeowner to refute (at substantial cost). Sucks. I see a MAJOR class action lawsuit coming over this practice.
By the way, lenders are happy to make signature loans with NO COLLATERAL at 7-18% for those with FICO scores of 800. So where is the logic? If I can pay a signature loan with no collateral why would I not be able to pay my HELOC (or risk my credit history) ?
I believe that many banks are doing this not so much for exposure control, but in the hope to upsell their customers to much higher-rate credit. THAT is a SCAM.