My client recently received a letter from Washington Mutual stating that they were reducing his equity line from $939,700 to $282,000. We hear about lenders reducing the amount of available credit on equity lines every day. This case, I believe, is an example of a lender taking advantage of a customer because of their own problems.
WAMU approved my clients for a 90% CLTV equity line based on an appraised value of $2,600,000. It was a fully documented loan, and it closed in January 2007.
After receiving this letter, my client and I had a conference call with a supervisor from the WAMU consumer loan division. He stated that the decision to reduce the equity line amount was based on the results of an automated valuation model (AVM) of the home that determined that the home had declined in value from $2,600,000 to $2,398,252. My rough math tells me that the value, based on their AVM, dropped 8 to 9%.
Because of a 8% to 9% drop in value, WAMU arbitrarily decided to cut the amount available by approximately 70%! Over one year later they decide to change the CLTV from 90% to roughly 70% based on a computer model of an expensive home, not even a full appraisal!
Both myself and my client understand that WAMU has the right to cut the available balance of the equity line based on their determination of value. What we do not understand is why they cut the CLTV from 90% of the perceived value to 70% of the perceived value.
My client is paying a rate based on a 90% CLTV. Did they offer to reduce his rate based on a 70% CLTV? No.
We asked the supervisor if he could change the amount available back to the 90% CLTV that the original loan was based on. This would reduce the available line amount from $939,700 to $760,000. He said no. He said my client could provide an appraisal from an appraisal firm of WAMU's choice, or a property tax assessment. Then they would consider increasing the line.
The actions of WAMU in this case stink! I truly believe that they are cutting my client's available credit because of their problems. What do you think?
 |
|
|
I am a mortgage broker who has been originating since 1985. I specialize in jumbo mortgage loans, commercial, and construction loans in California. Cash out and stated income loans are available.
How To Determine If It Is Time To Refinance Your Option ARM Loan
Does a 15 year loan make sense?
Buying Strategies With A Conforming Jumbo Loan
Burlingame and Hillsborough Homes For Sale
Jumbo Rates and Burlingame/Hillsborough Home Sales
ActiveRain Corp. is not responsible for the accuracy of the site's content (which is written by members of the ActiveRain Real Estate Network) and does not endorse the views of the real estate agents, mortgage brokers, and others listed here.
Powered by the ActiveRain Real Estate Network
© 2009 ActiveRain Corp. All Rights Reserved
Good morning Phil- I think you are right that they are cutting the amount due to their own problems, but in their defense, when homes go into short sale or foreclosure the 2nd lein holder often loses all the amount owed, so I can't blame them for reducing their risk.
I think that as long as WAMU is not demanding that the owner make any type of cash payment to pay the difference between the 90% and 70%, it is probably reasonable. If WAMU expects the owner to come up with cash, that and that alone could force a sale or foreclosure. That, IMO, would be criminal.
If, however, they are merely reducing an available credit line, unless the owner needs the credit for necessities, it could work to his advantage by greatly reducing his monthly out of pocket for interest.
Many home owners who purchased in the 2005-2006 years find that, through lower assessments, their home value is far lower than they owe. If they aren't going anywhere, the only solution is to continue to make payments as agreed and wait this mess out.
For folks who have to sell, it's very, vary bad news indeed.
This is pretty typical thinking of most lenders. Then again, if they were such astute business folks they wouldn't be in such a mess !
I have heard this happening to several people who have had existing lines of credit of their homes, and then it is either reduced or frozen - this was with other lenders though.
If your client needs the additional cash, I would recommend that he sits down with a mortgage broker ASAP, while there are still some equity lines and loans available. The key is for him to take what he needs plus what he may need in the future, so that the new mortgage company does not do the same thing as WAMU. There are several online savings accounts where he can earn 4% or higer on the money he is not using yet. If he does nothing now, and he needs the cash access in the future, he may be stuck without any options, due to value and or no loan programs available.
This is no different than when a stock brokerage makes a margin call. Its the right and proper thing for them to do
If you have borrowed against certain assets. and the value of those assets decline then you must either pay back the loan, or increase the value of the pledged assets. At least your client hasent been forced to liquidate. I used to have to do that when I worked as a stock broker.
I can understand why WAMU would want to reevaluate their LOC terms, but it does seem unfair that they lowered the LTV from 90% to 70%, without reducing the rate appropriately. I am also assuming that the borrower, has been making their payments on time. If that is the case, then it is obvious that this client is paying the price for WAMUs mistakes.
Pam - This home is not even close to going into short sale or foreclosure.
Lenn - Why is it reasonable to reduce the CLTV to 70%? If my client agrees with the reduced value, why doesn't WAMU reduce the amount to 90% of the reduced value?
Bill - I agree with you - the lenders got too risky with their underwriting guidelines which has caused a lot of these problems.
James - I agree with your strategy, but there aren't any lenders that I am aware of that have terms anywhere near what my client received.
Ron - In this particular case this is not like a margin call because the property has decreased in value 9%, yet they are reducing his borrowing power by 70%!
Tiffany - The borrower has been on time with their payments. I think WAMU has made a big mistake with this particular client. I wonder how many other clients of theirs that this is happening to.
There has been information in the news in the past few months that banks are stopping and/or closing down equity lines of credit. It sounds like that is what is happening here.
Ron's comment is interesting; it's basically akin to a margin call. Your client might have considered harvesting the equity for arbitrage before this happened.
Brian - I think one of the lessons learned here is that a HELOC is not like cash in the bank. I think many homeowners think of a HELOC as an emergency fund. It certainly has been sold that way.
My real beef with WAMU is that they priced my client's loan with a margin based on a 90% CLTV. Now they are at a 70% CLTV even using the declined value to make the calculation. They did not reduce the margin to the 70% CLTV margin. How is this fair?