'Marketplace' Report: Home Equity Home equity lines of credit are getting harder to come by. Why are banks making borrowing against a home more difficult?

'Marketplace' Report: Home Equity

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MADELEINE BRAND, host:

From NPR News, this is DAY TO DAY.

Home prices were down close to ten percent in the final quarter of last year. That's according to the Standard & Poor's housing index out today. It's the biggest drop in the 20 year history of that index. And that may be why banks are now tightening not only their mortgage requirements but their home equity lines of credit. MARKETPLACE's Sam Eaton is here now. And Sam, homeowners, they use these credit lines for all sorts of reasons, right? Not just to make improvements on their home. So what are banks doing now with those credit lines?

SAM EATON: Well, it's looking like these credit lines could become the next casualty following the tightening of the mortgage lending standards. The U.S.'s largest mortgage lender, Countrywide, has sent out more than 100,000 letters in recent weeks informing homeowners that they can no longer draw on their home equity lines of credit. Several other major banks say they're freezing accounts on a case-by-case basis.

Now, the reason this is happening is simple. As home prices tumble, many homeowners are finding that the amount they own on their mortgages is higher than the actually value of their house. That means if you took out a home equity line of credit for, say, $50,000 a couple years ago, today you may no longer own enough of your house to cover it. I talked to Wellesley economics professor Carl Case and he says the banks' reaction makes sense.

Professor CHIP CASE (Wellesley College): Banks are worried about people not having the equity to support those loans. If it's a home equity loan, there's got to be some home equity there. And so if house values fall and that equity disappears, the banks are really not gonna be lending against it; their acting to protect themselves.

BRAND: And Sam, so the banks are protecting themselves, but what does that mean for homeowners?

EATON: Well, here's the rub. One housing expert I talked to says it's the equivalent of coming home from work one day and having your dog growl at you. It really changes the game. During the boom times, homeowners use these loans to borrow against the rising value of their homes, which they could pretty much depend on; that allowed them to pay for everything from college tuition to family vacations, all with the added bonus of a tax write-off.

But now as home prices sink, the lines of credit are being used more as safety nets and as ways to consolidate debt. Take that away and for many homeowners it's the difference between defaulting on their mortgages or staying afloat. Now, the only recourse for homeowners is to prove that their home value hasn't actually declined, but that's a tough sell in today's market and with banks increasingly cautious about lending.

BRAND: And so with less money out there to spend, I imagine that's not going to have a good effect on the overall economy.

EATON: Yeah, the economy definitely does take a hit. It becomes yet another negative feedback mechanism. Home equity loans are used like credit cards, which in turn fueled consumer spending. Without that you have Home Depot out today reporting its profits for the end of 2007 were down nearly 30 percent. The U.S. economy takes a big hit when consumers reign in their spending, and it looks like that's what's happening.

BRAND: Thank you, Sam. That's Sam Eaton of public radio's daily business show, Marketplace.

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