Our Ass-Backwards Banking System

As the credit crunch metastasizes its way through the financial system, its worth recalling its simple origins: The lending of money to people who could not afford to pay it back. That error was then compounded, by failing to maintain security for loans by traditional metrics, i.e., insufficient loan-to-value (LTV) measures.

The banking sector’s solution to this problem? Cancel loans to the most credit worthy borrowers, including those whose loan-to-value exceeds traditional historical requirements.

Such was today’s shocker, as examined in Gretchen Morgenson’s column in the Sunday Times:

"The latest example of this is in the mass freezing of home equity lines of credit going on across the country. Reeling from losses on their wretched loan decisions of recent years, lenders are preventing borrowers with pristine credit and significant equity in their homes from tapping into credit lines that they paid dearly to secure.

In the last 30 days, lenders have sent several hundred thousand letters advising borrowers that their home equity lines of credit are frozen, estimated Michael A. Kratzer, president of FeeDisclosure.com, a Web site intended to help consumers reduce fees on home loans.

Major lenders — including Washington Mutual, IndyMac Bank and the Greenpoint Mortgage Unit of Capital One — say that declining property values are prompting the decisions to cut off credit."

While it certainly is in the interest of lending institutions to be cautious with loans where home prices are falling and the LTV no longer protects them against additional loss exposure.

What of regions of the country where property values are rising?

"But these actions are being taken even in areas where property prices are rising, Mr. Kratzer said. What’s worse, the letters provide no explanation for how the lenders determined that the property values underlying the equity lines had fallen.

Frozen home equity lines will surely intensify the consumer spending downturn and put added pressure on an already weak economy. Indeed, on Friday, consumer confidence as measured by the University of Michigan plummeted to its lowest level since 1982. The drop was attributed mostly to higher fuel and food costs, but consumers’ views on their current and expected personal financial situations dropped to their lowest readings since November 1982 and April 1980, respectively."

The timing is perfect: cutting back lending to people who can repay loans just as the economy slips below the waterline.

I should pitch that business idea as a start up to my VC friends: Getting fees from clients for providing no products or services.  "And, as you can see in slide 12, this model has an excellent profit margin…"

Here’s the sickest part of the entire affair: Borrowers with an
excellent credit rating will see their FICO score dinged when their home
equity line is frozen. Why? When a lender suddenly caps a $50,000 line
at $25,000, it appears that the borrower tapped out the entire amount
of the loan. This reduces their score.

The lawyers are — rightfully — gonna have a field day with this one!


UPDATE: April 13, 2008 1:31pm

Calculated Risk has a very different read on this:  HELOC Nonsense  (I’m not sure which offends Tanta more — the journalistic or banking aspects of this story).


You Thought You Had an Equity Line
Gretchen Morgenson
NYT, April 13, 2008

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  1. Scott Frew commented on Apr 13


    Far be it from me to defend the banks; they can reliably be counted on to lend to excess into every hot market,and then assiduously nail shut the barn door after all the horses have left. But I’m not sure GM’s article is quite the indictment she intends, or you interpret it, to be. First, the citing of Yakima, Appleton, and Raleigh-Cary’s rising Q4 property values aside, I think it’s fair to say, as fair as a blanket statement can be, that property values are rising virtually nowhere in the United States at the moment. And secondly, GM cites the many small business owners who use their HELOCs to fund their business ventures. Isn’t that what business lines of credit are for? And if these businesses don’t show the cash flow or profitability to justify lending to them directly, then aren’t banks correct to take a cautious stance with regard to loans to those businesses? This is, after all, how a credit crunch builds: individual businesses making decisions which are, at ground level, rational and correct in the assessment of self-interest involved (Why lend to a small business into the teeth of an economic slowdown, if that business’ prospects are expected to turn down as well?), but which are collectively deleterious to the national economy– animal spirits in retreat.


  2. UrbanDigs commented on Apr 13

    Hmm, interesting. While it SUCKS royally that high quality borrowers with tons of equity and great credit scores are being screwd by the reduced lines.

    However, it is not surprising that banks are doing this. They are crunched. They need to raise capital, not give out more. And clearly they went overboard in a number of areas. This is simply a side effect, a metastasized tumor as you say, and HELOC lines have been getting frozen and reduced for months now.

    Its a new world…I hope people are able adapt to a world where money isn’t just thrown away anymore.

  3. Ron commented on Apr 13

    forget about home loans, i have first hand experience that the banks have changed their view on personal loans. i know of a situation in which a borrower who has been a regularly borrowed money and paid it back and not in default of any loans was turned down for a bridge loan because of a LACK OF LIQUIDITY. This individual has in which as a net worth of about $10 million and annual earnings for the last 6 years in excess of $2.5 million(some years much higher). BTW the source of repayment for the bridge loan was identified and was a recurring distribution for the last 3 years(from a non-wall street business).


  4. Mel commented on Apr 13

    How can banks gave a profit if they hoard their money?

  5. mort_fin commented on Apr 13

    UrbanDigs raises a good point. A bank has less required capital against a $25k line than against a $50k line. Reducing the unused lines of credit is probably a way of hoarding capital. I’d bet that in those appreciating areas a phone call to the bank stating that you want to actually use that line would get it increased. Regulators might eventually catch on that $25k lines are really $50k lines, because they’ll be increased with one phone call, but that could take quite awhile.

  6. bdg123 commented on Apr 13

    I wrote of this possibility three years ago. It isn’t so difficult to comprehend that banks would create their own demise. They’ve done it so often it’s almost as easy to predict as the sun coming up tomorrow. Bankers aren’t exactly the salt of the earth and neither are they rocket scientists as we are finding out. (even though they hired rocket scientists, quants, to create this mess.)

    It is not accurate to assume those that appear credit worthy today are going to be credit worthy tomorrow. And, the riskiest markets today are the ones where property values have yet to start falling…. …because there simply is not enough money available to pay back all of the loans made. There never was. So, bankruptcies are going to rise. It’s a fact based on the amount of money available. Something that bankers knew yet it didn’t stop them. Well, at least they should have known. Given the cumulative IQ of Wall Street is as a herd, I might believe they actually didn’t understand this. But, it’s also one reason why the dollar will eventually rise. Supply and demand trumps speculators trying to kill the dollar for profit. Another special game the bankers are playing. Isn’t it wonderful that people from the U.S. are actually trying to kill the dollar for profit? We live in a great society where truth and morals on Wall Street have helped to create the Great Society……..

    In other words, everyone is now a major credit risk regardless of backward looking credit history. This is no different than those saying housing prices were going up so those markets were a good credit risk. Only to find out a year later they the hottest markets were the worst risk. In other words, in this cycle, historical correlations of all types will be broken.

    This cycle will turn most everything people believe to be true on its head. In the end, that’s a very good thing. But, it’s going to create alot of pain in the process.

  7. Joe commented on Apr 13

    We run a mid-sized landscape design/install business. During our insane spring season, aside from retained earnings, we invariably dip into our home equity line of credit. Wrote a check last Tuesday from our E-trade account. Check was returned on Friday, same day we received a letter from E-trade explaining the policy. Thanks!!!! Oops. Already wrote checks against it!!!

    Our equity in the home and property is at least 3 times our mortgage.

    Monday will be a mad scramble for funds. Hopefully, our local bank will extend our business line of credit.

    Also on Monday, we switch all of our retirement accounts from E-trade to someone, anyone, else.

    The money we’ll be withdrawing is actually more than our credit line. Hope in some small way it hurts them.

    Also, in recent years, most local banks have refused to issue small business loans. Everytime I asked, they’d ask “Hey, how much equity do you have in your home?”

    Small businesses have had no choice but to turn to home HELOCs recently.

  8. double R commented on Apr 13


    The entire tone of your article sounds as if some HELOC is a God-given entitlement to home owners, and not something that is contingent upon the voluntary agreement of 2 parties to a transaction.

    Far be it from me to come to the defense of the bank-sters. But as a few other posters alluded to–because the banks were stupid for lending out to people who couldn’t pay it back, they are hungry for capital. They simply CAN’T expand their balance sheets if they have any hope of surviving the credit crisis. That means some borrowers who wouldn’t have any problem in prior times getting a loan are denied this time around.

    Banks have to get liquid. I mean, there are depositors (like me) who would like THEIR money when they choose to make a withdrawl. I think MY DEPOSIT–cash already provided, is more important than the whim of some borrower to expand their debt ratios, regardless of how good their credit may be.

    As the idea of credit scores being good predictors of repayment: wasn’t that already tried with ALT-A mortages, and found, in current cicrumstances–to be flat out wrong?

    You can’t have it both ways–you can’t say the banks are stupid, and need more govt. oversight, and then say they are being unfair by restricting their lending to people who YOU think are good risks.

    If you think these high FICO borrowers are good risks, why don’t YOU fork over the cash, and give them a HELOC out of your own pocket?


    BR: I didn’t say it was unfair — I said it was Ass-Backwards.

    P.S.: I do not make HELOCs. Thats part of a long list of activities I do not engage in. These include painless dentistry, road paving, raising honeybees, cosmetic surgery and domestication of wild animals. I prefer to stick to the sweet spot of my competencies (as soon as I figure out what they are, I’ll let you know)

    However, if I WERE in the business of lending money to people, I would prefer it were to people who could pay it back, had good credit, and plenty of security. But hey, that’s just me.

  9. Winston Munn commented on Apr 13

    It is somewhat sad to hear complaints about loss of HELOC access as if it were an inalienable right. A sypmtom of swallowing the wrong pill and believing the “big lie” that wealth creation is the result of spending, not saving, that financing home equitity growth made more sense than putting cash savings in the bank.

    To mix a metaphor, when the tide goes out, you find out there is no free lunch – and you can’t borrow a swimsuit from the bank, either.

    I’m somewhat surprised by the surprise – what in hell did people think a credit crunch would do to loan availability?

    Banks are not in “money making” mode – they are in “survival” mode. Better get used to it for the next few years.

  10. Greg0658 commented on Apr 13

    BR writes “….The lending of money to people who could not afford to pay it back….”
    all that activity kept America working and cashing in

    on the holding back $$’s … imo its a grand game of Risk (Parker Bro.)

  11. John F. commented on Apr 13

    I’d characterize the origins of the crisis differently: artificially low rates created an asset bubble against which dodgy lenders were able to justify making absurd loans to risky credits. The subprime slime is just the top layer floating on a sea excessive leverage. [BTW, Mish Shedlock covered this HELOC business a few weeks ago.]

  12. Karl K commented on Apr 13

    You know, this article doesn’t really tell us much about the credit crunch…but it speaks volumes about The New York Times and the value of its stock.


    Shoddy reporting, innumeracy — a story that has as its “foundation” listening to one “expert’s” view, finding a couple of supporting anecdotes, and running in the direction of the “point of view” without even considering contrary or ameliorating evidence.

    “Hundreds of thousands” letters. How many, really? 101,000? or 999,999? Big difference.

    Did Gretchen get on the phone with banks and confirm? Or just take this guy’s Katzen’s word for it?

    And which lenders? Just the ones she mentioned? Or more? And how many more?

    How many lenders? How extensive is this really?

    Then we have this from Gretchen:

    “Frozen home equity lines will surely intensify the consumer spending downturn and put added pressure on an already weak economy. Indeed, on Friday, consumer confidence as measured by the University of Michigan plummeted to its lowest level since 1982.”

    Yessiree, there’s a cause and effect for you. “Several hundred thousand letters” lead invariably to “plummeting” consumer confidence.

    Barry, may you like The New York Times, maybe you don’t. But as a long time subscriber — I tell my wife, we need to know what the enemy is thinking — it is a broken institution, run by a guy who has never grown up, and taking its shareholder value right into the toilet.

  13. Winston Munn commented on Apr 13

    Barry wrote, “The lending of money to people who could not afford to pay it back. That error was then compounded, by failing to maintain security for loans by traditional metrics, i.e., insufficient loan-to-value (LTV) measures.”

    Actually, Barry, I believe you have this stated backwards. The rise in housing prices forced the change in LTV measures in order to provide the leverage to maintain the prices, which then led to lending to non-qualified borrowers in order to sustain an artificial growth. Subprime loans maxed out in 2004-2006, so it was not the 2001-2003 start of the party that caused the losses.

    As in all pyramid or Ponzi schemes, the ones who got in early did quite well – those late to the party – well, oh, well.

  14. Ross commented on Apr 13

    What do you expect from a bunch of inbred SOB’s.

    I’ve never had a HELOC because I bank at a ‘country’ bank. My banker knows me and has my tax returns and balance sheet/net worth statements.

    Small businesses need to find a small bank and offer to move your accounts there. These national Bank in a box on every corner have no lending authority except what the mother bank allows.

    Get a real banker and quit whinning. Your home is not an ATM machine.

  15. Jay Weinstein commented on Apr 13

    The indomitable Tanta does a much better job with this piece at Calculated Risk…I suggest reading it in conjunction with BR’s comments..

  16. Winston Munn commented on Apr 13


    How right you are. The flip side of too-big-to-fail banking is one-size-fits-all management.

  17. rickrude commented on Apr 13

    whats the big deal ??
    Lender lends money, takes losses,
    stops lending money. So what ??

    Bernanke should keep his nose out of the
    “Free Markets”.

  18. mw commented on Apr 13

    Insolvency (bad debt related) is the huge “burning TOXIC HOT POTATO” that everybody is tossing around. NOBODY wants it, the FED is attempting to cut it into TOXIC FRENCH FRIES, Thinking this might aid the system in digesting this BAD DEBT.

  19. Rob Dawg commented on Apr 13

    The banks are not cutting off “credit.” They are reducing their capital requirements and seeking to minimize lending at sometimes very low rates. First, these are HELOCs, emphasis on the equity part. It is their fiduciary responsibility to cap these loans if the LTV is actually breached. I agree that there is probably a lot of excess in their zeal but not all of this is some unfair or unwise practice.

    I’m sure WaMu regrets their loaning me 6 digits at prime minus but for now they are still honoring the deal. If they try to renege in my case (30% CLTV) then they are going to hear about it. And that is the crux, until I hear specific examples where the therms of the HELOC are arbitrarily breached it is a nothingburger.

  20. Marcus Aurelius commented on Apr 13

    BR wrote:

    “That error was then compounded, by failing to maintain security for loans by traditional metrics, i.e., insufficient loan-to-value (LTV) measures.”

    The crux of the biscuit.

    Nothing has anywhere near the value we thought it had (or worse, nothing has a value that can be accurately determined). Credit ratings are ratings, after all. Look where the ratings agencies took us. As house (or car or hamburger) is only worth what you can sell it for today. Future projections are prognostication.

    From BR’s post:

    “…preventing borrowers with pristine credit and significant equity in their homes from tapping into credit lines that they paid dearly to secure…”

    “…paid dearly to secure?”

    There is no security in a line of credit. There is no security in the “securities” derived from overleveraged lines of credit.

    Credit, as we have come to know it, is down for the count.

    We will learn, the hard way, what generations before us already knew: credit is a tool best used sparingly – it cannot drive the financial system.

    That way lies serfdom.

  21. Karl K commented on Apr 13

    rtalcott notes:

    For another take on this see:


    See, Barry? The New York Times is crap.

    Unfortunately, despite its dwindling circulation and in-the-ashcan stock price, it remains INFLUENTIAL crap.

    But, hey, I am an optimist. Slowly but surely bloggers such as Tanta who are 10 times as smart as Gretchen and its other reporters (like, say, Duff Wilson whose reporting on Duke lacrosse plumbed new depths of meretriciousness…or that poster child of journalistic incompetence, Judy Miller),along with media watchdog sites, will chip-chip-chip away at the Gray Lady’s crumbling edifice.

  22. mw commented on Apr 13

    In my previous comment I should say that insolvency is directly related with bad debt. Of course insolvency is NOT bad debt.

  23. Rich Shinnick commented on Apr 13


    You would do a great service to dig in on this a little more. Calculated Risk does a great job with respect to your above comments and the original source. Regardless of the “right or wrong” on this, the impact will be huge. For three reasons:

    1. Upon hearing about this trend of withdrawing lines, many people, including some I know, are draining their HELOC lines and putting the money in low rate savings accounts, etc. Impact: these loans will perform, consumers will lose money paying interest on the lines, consumer confidence will be shaken, etc…

    2. Many who have no clue about this consider their HELOC “personal wealth” and continue to spend and make decisions based on the availablility of their line. This spending does indeed fall in to BOTH business and consumer categories. The HELOC is financing for many, many small businesses.

    In fact a friend is considering some equipment purchase for his business and plans to use his line for it. This will impact business spending.

    I have a seasonal business and my HELOC which is actually in first position is mentally anyway my ‘back up line’ for my business. If that were to disappear it would impact my business decisions.

    3. This will force more homes on to the market and drive prices down. Face it, many pay their living expenses with their HELOC and when it is drained OR CANCELLED they will have to sell. In fact, dealing with that right now with a close family member.

    There ya go. This is a BIG DEAL and the consequences are only now being felt.

  24. DavidB commented on Apr 13

    This is why I always tell people debt should be a necessary evil not a necessary component of their financial lives. People usually laugh about it but if you are a debt slave and your ‘benefactor’ gets into trouble no one is required to bail your out or fund your enterprise though many corrupt politicians think they have the right to by taking my money to do it.

    The sooner people get to the point of funding themselves the less the bankers will control the economy. If you are not a worthwhile investment to yourself then why should you be to a banker?

    I don’t think google worries about a call from the bankers but the airlines sure do

    I know this argument flies in the face of current financial philosophy but times like this shows why it is right from where I stand.

    What the Bible said thousands of years ago is still true today. The borrower is servant to the lender

  25. donna commented on Apr 13

    So, people would rather lose their homes than a potential line of credit? If you get in trouble and can’t pay, then you lose the house. And just because someone has good credit doesn’t mean they won’t get sick or lose a job.

    As I keep explaining to my kids, and wish our financial market understood, “The rules are there for your protection”. Ignorting them, or not revising them when situations are changing, is rather foolish.

    My credit union hasn’t made stupid loans, and are more than happy to extend us a HELOC and not cancel it.

    But it’s not at 95% LTV, either.

  26. TM commented on Apr 13

    This is happening with many banks- seems to come and go.

    Maybe some of the banks, noticed they need cash more than customers.

    High quality borrowers getting frozen, Bank probably hadn’t even examined the loan file yet . And that may be a reason banks are suspending credit.-Find potential losses before occur. Like seeing if and who owns the first mortgage to buy it to protect, the second they own. Also check possibility of borrower will walk bc upside on mortgage, or short sale,- and all the while spending all the cash from the HE.

    Maybe if home prices drop so far that so many home owners owe more than worth, more will walk. Seeing others do it , everyone follows- a herd – almost like looting stores- “If every one else is getting a new TV, then why be the one getting nothing- can’t catch us all.” No one wants be only one left in neighborhood, and paying on 600k for house worth half of that.

    Lenders, Govt, legal system – etc.. must be careful not to give borrowers the perception of: not really accountable for bad decision, Talk of bail outs/relief – That impression alone, could cause some owners o believe they can stick the loss back on the bank, and that they’re the victims here. On the other hand, if lenders/government are too insensitive and appear unwilling to help at all, then borrowers could get really pissed and quit paying just for spite.

    Bad situation when some many mortgages never had equity to start with, add falling home prices, and even some also having 2nd & 3rd liens from piggyback/HE- even borrowers not having problems with payments walk out/pull short sale- Home Equity lender screwed.

    I bet we are seeing “rolling freezes” where lenders turn credit off, and then turn it back on. I mean, banks have to keep lending, and HE is $$$ interest. They have to generate income somewhere. Banks are cracks heads, they can’t resist for to too long, they always give in and come back for.

  27. rexl commented on Apr 13

    we had a small construction company, we did mostly public work, hard bid, fully bonded.
    part of our bond requirement was to keep a line of credit in place, ours was with BofA until they suddenly decided they were cancelling all lines of credit to contractors regardless of what kind contracting, this was in San Diego, friends also in the business and also using BofA were also cancelled. It was like being red-lined on the basis of the type of business and no explanation was given. This was around 2002-3. We had to hussle and get another line in place and did, we did not move all our accounts as that was too cumbersome.
    I did wonder what BofA knew and it was certainly early in this cycle.
    The line of credit was not directly tied to any one asset but to the business which was an ‘s corp’.
    this along with other considerations is what led us to begin thinking of getting out of the business.

  28. Mr. Bubbles commented on Apr 13

    Hmmm…Its sooo nice to be renting, 100% liquid with a high FICO, & watching this slow-motion trainwreck from the sidelines.

  29. rexl commented on Apr 13

    i think that is a very benign, cynical and or naive interpretation of redlining. banks certainly went too far in the opposite direction, loaning to anyone who could not only walk but crawl in the door.

  30. dukeb commented on Apr 13

    The FICO score mania of the past several years is absolute media-driven, marketing bullshit! It’s only real value is if you are actively seeking out a mortgage, and even then, it’s only a PART of the picture. People act like FICO is GOD watching their every move and they cower and refrain from doing things that might upset it. FORGET FICO, FRIENDS! Unless you are actively looking for a house, free yourself from that sense of self-repression. (I mean, suing over something because it might ding a FICO score…holy cow!)

  31. AJ’s Pizza commented on Apr 13

    We own several pizza parlors and a fairly successful upscale restaurant in a seasonal vacation region. We opened our first Pizza place over 20 years ago, and it has been in continuous operation ever since.

    My wife and I both have decent credit (700+). It is always a pain to get a small business loan, for as long as we have been in business.

    Starting around 1999, our bank actively encouraged us to get a cash out refi, followed by a HELOC instead of a SBA or bank loan.

    We’ve never defaulted, never even been late on a payment. Our business is seasonal, and while we get by in the off season, we do more than 50% of our revenue from Memorial Day to Labor Day.

    Without a line of credit, we will be in deep trouble. I am afraid to even ask the bank about this . . .

  32. Winston Munn commented on Apr 13

    I am somewhat stunned at the lack of judgement – the pure faith in system – evidenced by reliance on HELOC.

    Whatever led people to accept without thinking, to believe without challenging, to follow the crowd instead of taking the path less worn and thus avoiding the cliff’s edge?

    The crowd said the way to build wealth and save for the future was taking out a $500,000 loan on a non-income producing asset – that paying interest on that asset made more sense than accumulating interest via real savings or investments in income-producing assets.

    What kind of moron buys into that fairy tale?

    I guess there really is one or two born every minute.

    P.T. Barnum must be rolling on the floor of his coffin, tears streaming down his face, beating the floor, kicking his legs, and yelling, “Make ’em stop. It’s too funny.”

    Now all the talk is about solving an overspending problem by more spending – will the crowd swallow that one, as well?

    If so, it may be time to buy a circus tent – with no mortgage, of course.

  33. Ross commented on Apr 13

    You sir are right on the money. My 26 year old daughter was visiting last summer (she teaches school in Praha) and asked me to get a credit report on her. As she was returning stateside, she had been told by former classmates and others that she needed a good FICO score or her costs for an apartment, insurance etc would be high.

    I told her how the corrupt system worked with credit scoring. She decided to stay in Prague another year.

    Our whole system is geared on credit and leverage. Clever marketers tell you to buy on credit, (and pay for) frequent credit checks and pay money to protect your identity. To me, this is a form of coersive insurance fraud. But Americans will believe anything if they hear it often enough.

    Old Grandpappy was right. If you buy something on credit, you don’t OWN it til it’s paid for. So much for the term homeowner. They are at best in a joint venture with a bank or simply renting.

  34. Bob A commented on Apr 13

    HELOC’s were used frequently to get to 100% LTF financing. The Heloc was the 20% part of an 80/20 loan where the 80 was either ARM of fixed and the 20 got you to 100% LTV with 0 down. This avoided the cost of mortgage insurance which was required on conventional loans with over 80% LTV. HELOC’s had a higher and variable rate.

    So I wonder how many HELOC’s in question really have any equity cushion at all.

    I sure wouldn’t advance money on a loan I thought might put a borrower over 100% LTV.

    And how could you know that’s not what you were doing without new appraisal, or at least some sort ofd review?

  35. Rich_Lather commented on Apr 13

    I’m with Mr. Bubbles on this. Assuming the article is accurate instead of a collection of anecdotes, it seems deflation would be in order, at least in the case of dollars becoming more scarce. My hope is that the fed will not counteract this by running the printing presses in overtime.

    It does indeed seem to be a slow motion train wreck. How is this going to filter through the system? Delayed expansion and layoffs at the mom/pop level and filtering up through retail to larger companies.

  36. Double R commented on Apr 13

    In responding to Double R, Barry Wrote:

    “However, if I WERE in the business of lending money to people, I would prefer it were to people who could pay it back, had good credit, and plenty of security. But hey, that’s just me.”

    Barry, didn’t you finish your blog entry regarding the NYT article by saying “The lawyers are — rightfully — gonna have a field day with this one!”

    I take that to mean you think borrowers actually have some sort of legal claim against banks here, and that they were somehow “wronged” because the bank decided it was in its own best interest to forego potential profit, and reduce capital requirements.

    Suffice it to say, I think such a view is absurd. The LAST thing we need is to have more lawyers already stirring a stinky pot of you know what.

  37. Barry Ritholtz commented on Apr 13

    Double R:

    I was speaking generally, and not referring to any side of the debate — meaning, litigation seems inevitable.

    But if the article is accurate, and people paid something for a HELOC — and I have no idea why they would — be it fees, closing costs, or even points to lower interest rate, they are likely entitled to some service in return for fees paid.

  38. AGG commented on Apr 13

    Great comments by Ross, wm, Winston, dukeb and others. I just want to add that most bank managers are not rich, are dependent on salaries and run with the herd mentality. As to the FICO score, the Fair Isaac math leaves a lot to be desired. It’s another example of shortcuts used by lenders to avoid thinking. Anyway, the pendulum is swinging towards overkill on collateral. Way back in 1970, I decided to get a loan to start a track record of good credit. I deposited $200 in a savings account and asked for a loan of $200. The bank said I needed $256 in my savings account in order to have sufficient collateral for them to approve the loan. I guess we’re back to that.

  39. AGG commented on Apr 13

    About the “hot potatoes” being turned into hot french fries. It looks like we may have a rash of insolvent “tater tots” running around as well. Banks don’t belive in sharing the wealth but sharing the debt, well, that’s another thing.

  40. Mich(^IXIC1881) commented on Apr 13

    This only adds to my confusion: I have been a long time Chase credit card holder. In 2005, I have purchased a house with 80/15 piggyback mortgage from another bank. 2 weeks ago, I received a letter from JPM, offering me heloc at discount rates!!

    It took me by surprise because I never received such offer from JPChase before, not even when they were giving away helocs freely. As soon as I get that offer, the next thing I did was to buy puts on JPM.

    Side note: It was also surprising they have “Ms.” before my name considering I have been a customer of their organization for years. So much for CRM, CDI, huh.

    I don’t agree with Mr.bubbles, I would have to pay a lot more on rent than my mortgage for a comparable accommodation. So, I am happy with my two fixed-rate mortgages that gets me the security knowing landlord is not going to jack up price in two years when interest rates hit higher. I think, one will have to make same payments for the same house (through reduced house price and increased rate) in a few years.

  41. DownSouth commented on Apr 13

    dukeb, TM and bdg123,

    Thank you very much for your comments. They disabuse me of a misconception, which is that people borrowed against their house in order to buy ski boats, home entertainment centers and Caribbean cruises.

    For there appear to be a whole class of borrowers, like yourselves, who borrowed against their houses not to invest in consumption, but production (small business).

    Winston Munn suggests that you “Get a real banker and stop whinning.” But I think his rather callous and jaded remark glosses over a very dangerous tendency, and that is with the advent of the huge banking monopolies or quasi-monopolies, the financial system has become incredibly rigid. They offer only a handful of products, and their customers, like yourselves, have to cram the square peg of a small business loan into the round hole of a HELOC. The sad truth is that there probably aren’t too many “real bankers” around any more.

    It also adds an extra dimension of how small businesses are going to suffer from the mortgage credit crisis. A lot of attention has been given to how the drying up of the home-equity-ATM is going to negatively impact spending, which bodes poorly for business. But little attention has been given to how the closing of the home-equity-ATM is going to affect the ability of small business to obtain financing and credit.

    So your comments only serve to reinforce my since of gloom. The recent machinations of the FED and Treasury, by creating an almost fail-safe environment for the huge banking monopolies, may have eased concerns on Wall Street and the stock market. But the anecdotal experiences which you have been kind enough to share lead me to believe that on Main Street, all is far from being well.

  42. DownSouth commented on Apr 13


    dukeb, TM and bdg123 should read AJ’s Pizza, rexl and JOE.

    Winston Munn should read Ross.

  43. BDG123 commented on Apr 13

    Now, I’m not typically a fan of attorneys seeking negligence but let’s be real re the comments about not needing any more attorneys. It is hardly fair to believe the the borrower in any of these consumer cases are equally complicit. Banks are supposed to have entire practices built around risk management. Consumers are deer in the headlights comparatively. In the battle between consumers and corporations it’s typically a lopsided one where the consumer usually got the hose.

    To blame the millions of people for signing a piece of paper where the was likely less than full disclosure from many financial firms or worse and an uninformed consumer is exactly why we have consumer protection laws. Not everyone spends their day researching every angle and contemplating every point of potential fraud before joining into a contract with a company. Most companies on the other hand do exactly that. THAT VERY REASON is why consumer protection is so important. This entire crisis leaves many consumers with a legitimate beef on many of these schemes. And, as Barry said, the attorneys are going to have a field day. And I can’t see any reason why they shouldn’t.

  44. RW commented on Apr 13

    One of the trends that doesn’t get discussed much (other than by Tanta at Calculated Risk and a few others) is the well-established trend in loan underwriting towards replacing experienced, back-office staff who were expected to analyze loan applications in detail to less experienced (lower salary) staff who were expected to meet volume targets (lower costs overall since more loans could be approved per unit staff per time). I believe a key element in this trend was automation, the use of sophisticated software that could analyze applications using literally hundreds of variables with a FICO score chief among them.

    The nationalization or globalization of lending and the morphing of simple mortgage pools into ever more arcane securities logically followed.

    Except houses are also homes which aren’t quite like other assets and, even if they were, credit history and all the other variables don’t tell you nearly enough about what may happen if you underwrite an inappropriate loan or extend a credit line for an inflated asset representing the bulk of a family’s net worth that is expected to appreciate and doesn’t.

  45. Estragon commented on Apr 13

    I’ve run smallish businesses for around 30 years, and my experience with lenders is they’re in the business of renting you an umbrella while it’s sunny, and taking it away at the first hint of rain. It’s a pain, but you need to pack a raincoat just in case.

    AJ’s pizza et al: The bank may not like to lend on a HELOC because the vig is light. I’d approach them on a term loan or something giving them more spread, and I’d also look around at other lenders BEFORE you need the cash.

    On the HELOC thing generally, the fed’s numbers don’t appear to support the notion that there’s any widespread reduction in HELOC’s (yet). Bank assets have uncharacteristically shrunk since mid-March (partly explained by FAS159 adoption), but line 8 “revolving home equity” has continued growing at a rate roughly consistent with that of the last several months.

  46. Ross commented on Apr 13

    Bankers want to lend to people who do not need the money. They will lend on relationships, good collateral and good prospects for repayment. I’m guessing HELOC’s were accessed because of the favorable terms, cheap VIG.

    If a business person needs capital and has ‘excess’ equity then refi and pull out cash for your business. Once you no longer need that cash, paydown your mortgage.

    HELOC’s were ATM machines. A bank will make legit loans at higher rates for legit purposes. It’s tough to borrow working capital and businessmen who used assumed home equity might want to rethink their business practices.

    Folks, HELOC’s are a rather new product. Second liens used to be for the pool or redecorating or adding a room. When you use mortgage debt for non real estate purposes you have added risk to the family balance sheet.

    Even with consolidation, there are still competent banks out there with real live credit analysts who want to know their customers. I said once before, my banker has been known to talk customers out of that new car or whatever loan because he knew his customer and thought he was doing them a favor.

    Borrowing and lending money is a serious business. Greed and computer valuation models mucked up a perfectly good system.

    We’ve got commercials about the evils of smoking, drugs, alcohol and safe sex but I have yet to see one about responsible borrowing. Where were the parents and schools? Life can be so simple with a little knowledge and discipline. But there’s the catch word, discipline.

  47. Peter Davis commented on Apr 13

    The banks are doing what they inevitably would do, which is to get scared shitless when the chickens come home to roost. They’re like George Costanza running for the exits during a fire. They’re too scared right now to even think about things like “due diligence”, “asset values” and “common sense”. Of course, they were too greedy a few years ago to think about these same things. Which leads me to believe that, really, should the banks even be allowed to participate in the banking industry in the first place?

    Maybe that’s the problem. Maybe instead of having banks handle our banking we should hire someone else, like the Amish. Granted, we would lose out on things like ATM’s, automatic checking and online bill paying, but I’d bet that Amish don’t deal in off-balance sheet derivatives.

    I think I’ve discovered something. Bankers really kind of suck at this whole banking thing. Shouldn’t we just give them a few hundred dollars and just send them to the penny slots at Foxwoods?

    Really, nothing’s surprising me with this anymore. It just keeps getting more and more absurd. We are now rapidly nearing the point where the banks will disclose that, in fact, their reserves are composed entirely of Monopoly money and Barnes and Noble gift cards, at which point the thimble and top hat will be going for 10 grand on eBay and we’ll all be doing our banking from the Starbucks by the DVD section.

    Hope everyone likes Caramel Machiatto’s…

  48. Francois commented on Apr 13

    About Tanta’s motivation to write the “HELOC nonsense” post at CR:

    “What sent me over the edge was that Barry (yes, our one and only Barry) fell for it. Barry’s way smarter than your average reader of the Times. It just makes me want to cry.”

    Tsk tsk tsk! Barry breaking the heart of such an excellent lady.

    What a shame! ;-)

  49. DH@TH commented on Apr 13

    This is a new form of bloggyness today with Tanta, et al sending over her trojan ponies to make it appear that Calculated Risk has some type of importance in the blogworld, but all you have to do is look at the reported traffic there and then go over all the mindless posts, which day-to-day are filled with none stop bitching about nothing!!

    This attempt today to steal market share is absurd! I hope they go after bigger fish and continue to stay off topic as they run themselves further into the ditch! Her ratings are a reflection of attitude and tricks like this, but, in all fairness, she needs this really bad…..LOL!

  50. DH@TH commented on Apr 13

    Re: ” The IndyMac letter said the Martins’ credit was being suspended because “the value of the dwelling has declined significantly below its appraised value used at origination.”

    I just found this post:

    Dear mliu,

    We regret to inform you that your IndyMac Bank Home Equity account has been temporarily frozen. This means that you will be prohibited from making additional draws against your line of credit. This action is being taken pursuant to the Home Equity Line of Credit Agreement, Section 14, Suspension of Credit and Reduction of Credit Limit, which allows us to take action when there is an adverse changed in your property value. In this case, the value of the dwelling has declined significantly below it appraised value used at origination.

    On a quarterly basis we will automatically re-evaluate the value of your property. If the appraised value of your property sufficiently improves, we will remove the freeze and notify you accordingly.

    During this temporary suspension, we will continue to send billing statements to your attention, Please be aware that you remain responsible for any unpaid balance until the account has been paid in full. We therefore encourage you to continue making paments on your account.

    Indymac Bank
    Home Equity Division

  51. TM commented on Apr 13

    Home Equity loans became the fad loan.
    I worked several years on the mortgage trading desk for a large financial institution-

    Home equity loans caught fire in ’06, really never heard much about it – HE 2nds can’t be securitized into MBS pools, would have go to trouble to bulk up a whole loan package and find a Wall Street house to dump it on. Apparently, it wouldn’t had been much trouble.

    However, 10yr was getting up around 5.5%%, mortgage rates high 6’s-7, no borrower wanted to refinance at much higher rate just to extract a little equity he gained from rising prices, many had just cash-out refi’d, wanted to keep the rate and pay all the fees.

    Enter the craze for 2nds- keep origianl rate, and only pay a higher rate on the second loan. And with prime rate 7-8%, Yield curve flat. The bank would buy ARMs from us-for its portfolio, but didn’t havce much for them volume was dried up as folks switched into fixed rate with curve being flat and LIBOR and CMT being over 5% making payment reset much higher.

    BSC and LEH were gobbling up so much Alt-A (well every one was) and paying up for it too. These no-doc, write the property address on an index card,mainly were based on the premise of collateral, not borrower. Required some money down though, that was the protection. With the robust home appreciation, loan goes bad, we get the property – at a higher value and equity, very low risk of loss. Which was true, until price stooped going up and often there wasn’t actually equity in the house bc HE 2nd used for down payment. May be 1st position, but incentive to stay in the house declines when borrower has no skin in the game originally, and is upside down. Home Equity loans could be come a major problem. WaMu has got its hands full. Construction loans, don’t like them either, they could spell trouble.

  52. Johnnyvee commented on Apr 13

    There should be a name for this because it is a run on the bank, but its the bank that is running. “Bank on the run.” “A run on the borrowr.” Anyone got a suggestion?

  53. joe commented on Apr 13

    oh come on, where’s the linkfest?

  54. Emma Anne commented on Apr 13

    I will say that getting a $10K line of credit on my business account was rather difficult (and I had been in business making money for a while and this was my regular bank). I had to show them profit/loss, prove I had insurance, etc.

    Whereas my Chase credit card has a $35K limit and they practically begged me take a $50K HELOC, without knowing anything other than that I have paid my bills for a while.

    So yeah, telling small business owners they are idiots for using their HELOC as a business LOC seems out of line to me. That is plainly how the banks wanted to handle it.

  55. AGG commented on Apr 13

    In Greenspan’s words, “the risk calculation model was too simple”. All that fancy software to replace people and increase productivity wasn’t complicated enough. We need to complicate the software, but heaven forbid adding people because that would decrease productivity. This guy needs to seriously GO AWAY.
    As to the HELOC thing, perhaps it would be a good idea to have a fund of cash to cover slow periods rather than a line of credit. In business administration we were taught that you should expect losses for the first two or three years. Once you have a going concern, you are supposed to have the liquidity to cover slow periods.

  56. Winston Munn commented on Apr 13

    The discussion of FICO is relevant, but lest we forget, it was the rapidity of utilizing FICO scores that was a huge boon to the fee collection and securitization industries.

    FICO would have been a big part of productivity gains in the mortgage industry, allowing crap loans to be generated at warp speed compared to the older, slower, safer methods.

    Without the productivity gains of FICO, it probably would have taken another 10-15 years to blow up our financial system.

  57. Alex commented on Apr 13

    The fact that this story even got published is sad really. It is a symptom of a societal malady called debt addiction.

    Like any addict, too many Americans live in this egocentric fantasy that all the world must provide the fix they need. In this case it is debt.

    So with this psychological twist in mind, it is easy to understand this outrage at having “their” line of credit cut off.

    I will tell you an account that is not ever cut off without notice. That would be your savings account. Ever thought of putting some effort into filling one of those?

  58. Ross commented on Apr 13

    You continue to amaze. You summed up FICO in such a brief post.

  59. Ross commented on Apr 13

    Has everyone seen the cry for food help by the World Bank? They estimate $500 billion is needed for the most needy. About 20 countries have imposed export tarriffs or bans on grain exports. Riots are becoming commonplace.

    Governments will topple. We spend 14% on food. China about 35%. Africa over 50% in some countries. China has an iron rice bowl policy. Read Pearl Buck’s ‘The Good Earth” and you will understand why.

    Ethanol and bio diesel are doomed, finally!

    Pray for a good crop year. Famine, once isolated by mal distribution may become a cause celibre for some Che’s and Mullah’s.

  60. Credit Cards commented on Apr 13

    Banks might be freezing HELOCs but they are trying to give people credit cards like crazy lately.

    Wonder why? 9.9% APR on many, but you read the fine print and there’s a “default” rate at 30%. So… one late payment and the price of the item you purchased increases by 20% per year.

    Nobody worth lending to will borrow at these absurd rates and the ones who do borrow will not pay it back. Good luck on this one.

  61. Credit Cards commented on Apr 13

    Banks might be freezing HELOCs but they are trying to give people credit cards like crazy lately.

    Wonder why? 9.9% APR on many, but you read the fine print and there’s a “default” rate at 30%. So… one late payment and the price of the item you purchased increases by 20% per year.

    Nobody worth lending to will borrow at these absurd rates and the ones who do borrow will not pay it back. Good luck on this one.

  62. DH@TH commented on Apr 14

    Final word on this topic:

    http://selco.org/homes/ disclosur…ty.variable.asp

    SELCO Community Credit Union – ADJUSTABLE RATE

    b. Suspension of Credit/Reduction of Credit Limit. We may refuse to make additional advances on your line or reduce your credit limit during any period in which the following exist or occur:

    (1) Any of the circumstances listed in a., above.
    (2) The value of your dwelling securing the Account declines significantly below its appraised value for purposes of the Account.
    (3) We reasonably believe that you will not be able to meet the repayment requirements of the Account due to a material change in your financial circumstances.
    (4) You are in default under any material obligation of your Account. All of your obligations under the Account (Agreement and Deed of Trust) are material to maintaining this Account.

    Or better yet, what about law for civilians:

    Title 12: Banks and Banking


    http://ecfr.gpoaccess.gov/cgi/t/… idno=12

    § 226.5b Requirements for home equity plans.

    (A) The value of the dwelling that secures the plan declines significantly below the dwelling’s appraised value for purposes of the plan;

    6. Significant decline defined. What constitutes a significant decline for purposes of §226.5b(f)(3)(vi)(A) will vary according to individual circumstances. In any event, if the value of the dwelling declines such that the initial difference between the credit limit and the available equity (based on the property’s appraised value for purposes of the plan) is reduced by fifty percent, this constitutes a significant decline in the value of the dwelling for purposes of §226.5b(f)(3)(vi)(A). For example, assume that a house with a first mortgage of $50,000 is appraised at $100,000 and the credit limit is $30,000. The difference between the credit limit and the available equity is $20,000, half of which is $10,000. The creditor could prohibit further advances or reduce the credit limit if the value of the property declines from $100,000 to $90,000. This provision does not require a creditor to obtain an appraisal before suspending credit privileges although a significant decline must occur before suspension can occur.
    Bishop 2 Knight | 04.14.08 – 1:17 am

  63. Greg0658 commented on Apr 14

    Ross writes – “Ethanol and bio diesel are doomed,”

    NOT – but I hope the energy shortages & inflation workout another way

    on “They estimate $500 billion (food) is needed for the most needy”

    a client has a quip on his invoices
    “give a man a fish he eats for a day | teach him how to fish he eats for the rest of his life”

    meaning | breeding communities that are doing just that without creating their survival platform | “no soup for you” | not being heartless, temporary shortages OK | war with neighbors over the same food stuffs … back to the same old story

  64. D. commented on Apr 14

    If the baking sector wasn’t so ass-backwards in the first place, people wouldn’t have gotten those equity lines of credit and the bubble would have been averted.

    Banks have always lent when you don’t need money and take away when you need it.

    This has been going on for decades, I don’t understand how people thought this would actually change!

  65. D. commented on Apr 14

    You can’t get blood from a stone. If banks need to raise capital they’re not going to call back bad loans, they’re going to call back the loans of those who have savings.

    I’ve been warning my husband about this. Either your house is toatlly paid off or you donw payment as small as possible.

    If the crisi intensifies, I wouldn’t be surprised one bit if the bank refused to remortgage my 90% paid off house in a year and force us to liquidate some investments! I don’t trust bankers one bit, that’s why I’ve always kept my debt separate from my savings.

  66. jkw commented on Apr 14

    If the banks need more capital, why are they still cutting savings rates? There are high-traffic web sites that monitor interest rates. Raising the rates on your savings accounts at least 25bps above other banks will give you millions in deposits. Lowering the rates will drive millions away. Since the banks are lowering their deposit rates, they don’t seem to be interested in capital.

  67. D. commented on Apr 14

    “Bank Of Montreal To Issue C$900 M Of 6.17% Subordinated Indebtedness, Due 2023”


    200M of Preferreds.

    Maybe they want more stable capital

  68. Dane Wayne commented on Apr 15

    As a small business owner I learned very quickly that banks today are only willing to loan money to people that don’t need it.

    Small businesses that do need financing, get bent over and has been previously posted basically have to provide cash collateral with insurance on that collateral to boot.

    With the little guy and the banks liens on assets and insurance on receivables these banks have no risk.

    While that same bank throws money at oily big boys like Enron accepting worthless stock as collateral, they squeeze the crap out of the little guy.

    Funny thing, I’m still in business and Enron is gone.

    The whole method of today’s so called bankers is probably one of the biggest factors that hinder economic growth: Throwing money at large companies that steal via creative accounting and rejecting financing small companies that make money the old fashioned way.

    I know somebody has to carry the overhead of all those band V.P.’s.

    But it’s not going to be me. Fuck ’em. I’m stronger using my own money and I grow a little slower.

  69. J.T commented on Apr 15

    I have had a HELOC for 5 years with ETRADE, and the line was based upon my home value at that time. The value of my home has increased significantly, even in today’s environment so that with the line of credit our lTV is not more that 70-80% of the total value.

    I decided this year to use my HELOC for a major home improvement project, which should increase the value even more. However, here I am only 40% the way through my project and I got a letter yesterday from ETRADE stating that they were freezing my HELOC. Not based on any information that my home value has gone down (my area has done well, and actually slightly increased in the last year) and I have 30 days to provide them, at my own expense, an updated assessment.

    However, half of my home is completely
    torn apart so that I can’t get a real assessment and I can’t finish the project because they have frozen my money. I wonder how many other people are in my shoes?

  70. Mike commented on Apr 16

    Great discussion. Two points:

    1. Believe it or not, your FICO matters! The other day, a government contract worker’s employer denied him a promotion based on his lower credit scores. According to this gentleman, his employer held a minimum score for this position. Despite an overall strong work history, this one item apparently prevented the promotion.

    As mentioned a couple times in this thread, potential creditors, utilities, phone companies,etc use credit scored to determine “worthiness.”

    Are you worthy?

    2. Debt-to-credit utilization. Aside from the discussion re: right or wrong to freeze a HELEOC, one credit scores should suffer as a result of this policy change…it took Cap One customers complaining and canceling for Cap One to alter its reporting policy.

    Last, have any of you heard of an alleged internal memo floated inside Countrywide Mortgage, stating Countrywide is no longer considering short sales requests for ALL *non*owner occupant properties? Countrywide Corporate, Countrywide Media Relations & Bank of America refuses to commment.

    One Countrywide supervisor, on condition of anonymity, stated this policy artificially buoys Countrywide’s numbers as BOA auditors review files.

    Any knowledge of the policy…not necessarily the “WHY?” are appreciated.


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