Dear Dr. Don,
We have received a letter from Countrywide Home Loans stating a suspension on our home equity line of credit based on an automated valuation method, or AVM, that home values are declining in our area.
We disagree. How are declining home values related to a suspension on our line of credit? We have great credit and are making our payments faithfully. Why are they punishing customers who are able to make payments and are not foreclosing?
A home equity line of credit is secured by the value of the property. If the value of the property goes down and the credit line does not, the lender is put in the position of making an unsecured loan. The risk-based pricing models used by the lender don’t anticipate a situation where the lender is making an unsecured loan.
That said, there’s a lot of controversy surrounding the automated valuation method, or AVM, models used by Countrywide and other mortgage lenders and their ability to correctly value individual properties.
I asked Countrywide to weigh in on your situation. They referred me to a
media statement regarding the company’s home equity lines of credit:
In keeping with its sound risk-management and responsible lending practices, Countrywide is reviewing and analyzing the home equity lines of credit in its servicing portfolio. Among the objectives of the analysis is a determination of the impact of lower property values on existing accounts. This analysis may result in the company suspending borrowers’ future access to existing lines of credit. Customers affected by this analysis will be notified by mail. Customers who do not receive a letter may continue to use their home equity lines of credit. These measures do not impact the company’s desire to originate new home equity lines of credit based on current property values and borrower qualifications.
- According to Regulation Z, Section 226.5b(f)(3)(vi)(A) , a creditor may prohibit additional extensions of credit during any period in which the value of the dwelling that secures the plan declines significantly below the dwelling’s appraised value for the purposes of the plan.
- A total of approximately 122,000 customers have been impacted nationwide.
Countrywide borrowers who have been affected by this may contact customer service at 800-669-6607 if they believe that there has not been a significant decline in the value of their home.
The bottom line is that the Federal Reserve Board’s
Regulation Z gives lenders the ability to limit credit. You’ve got the ability to discuss your home’s value with Countrywide and get your credit line reinstated.
Because closing costs are generally low on home equity lines, you can also consider voting with your feet and trying to find a new lender.
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