Monday, February 25, 2008

When Your HELOC Is Toast

The best and most satisfying reading of my weekend came from the scribes at the Washington Post:

Washington Post: Homeowners Losing Equity Lines

(Need a log-in to read it? Try BugMeNot.)

Ah, Credit Crunch, how do I love thee?

It is rather nice to see morons get their financial posteriors handed to them. In the case of the Post article above, our moron's surname is Corazzi.

The Corazzis apparently had recently opened and were enjoying the sweet fruits of a $95k home equity line of credit (HELOC) from USAA Federal Savings Bank. Alas, prolonged use of the Corazzi Home ATM 'twas not to be.

Roughly five months into the deal, the bank called to tell Ms. Corazzi that they were yanking the HELOC, and pronto. Homes in her county (they said) had skidded in value. No way was the bank going to be left holding this bag.

"I got off the phone and I was shaking," said Corazzi, who was using the money to pay preschool tuition for her twins. "I was near tears. We needed this credit line to get us through some tough times."

Fantastic. Wouldn't want to have to rely on something as bland and passé as CASH SAVINGS, would we?

Anyone care to guess whether or not such savings are completely missing from the Corazzi household? (By the way, you can see purported pics of the Corazzi abode at the Housing Bubble Hall of Shame. Note the spruced-up kitchen.)

Banks Pull in the Reins; Corazzis Gag

Why would USAA do something so unAmerican as this, you ask?

Well, it MIGHT have something to do with the fact that second-mortgage holders have a darn tough time NOT losing their proverbial shirts when homeowners saddle up on the foreclosure trail. In such cases, once property values give way, these HEL and HELOC originators are in prime position to recoup a big fat sum of zero when all is said and done.

Now that home prices have dropped in many parts of the country, lenders are nervous that they may never collect the money that they extended to borrowers. They are responding by freezing or lowering the credit limits on home equity lines, leaving thousands of borrowers like Corazzi in the lurch.

Hmmm. Sounds like a good idea to me.

"Nearly all the top home equity lenders I know of are doing this or considering doing this," said Joe Belew, president of the Consumer Bankers Association, which represents some of the nation's largest home equity lenders. "They are all looking at how to protect themselves as real estate values go down, and it's just not good for the borrowers to get so overextended."

Overextended? Who? Us?

Corazzi initially used her line to consolidate debt. She and her husband took out the credit line in October because they thought her job was in jeopardy.

It was. In December, her salaried position as a loan-processing manager at a local mortgage bank changed to a commission-only job.

Given the slowdown in the industry, Corazzi has collected only one paycheck since then. Her husband, Ron, sells large-format copiers and printers to builders, and his salary alone cannot support them and their four children, ages 4 to 8.

Let's see: Her job? Tied to the mortgage industry. His job? Tied to the building industry.

Now add "real-estate bubble" and "pop" and "credit tightening" to the mix. See where this is going?

That's right: What a GREAT time for banks to be extending HELOCs! And what a fabulous time for families with ZERO CASH SAVINGS to use said HELOCs and take on mid-five-digit debts just to make ends meet!

By the time their lender called, the couple had $45,000 remaining unused on the credit line.

Well, that's some good news. At least they were able to tack on $50k of "secured" debt before USAA turned off the spigot.

Meanwhile, they [Corazzis] are trying to open a new home equity line elsewhere, but chances are slim given the change in Nancy Corazzi's job status and the drop in their home's value. Five months ago, the Ellicott City house was appraised at $560,000; the lender says it is now worth $469,100.

Holy heck — who did that appraisal? And can they come take a look at my place, too? My net worth could use the padding (on paper, of course).

The Comments Are Fun

Oh, and don't miss the fun and excitement happening in the hundreds of comments left at the Post story, either.

Some choice morsels of my liking:

The WP should be more selective who it chooses to depict as "victims" of today's reality. People living in half-million dollar houses and paying tuition to send twins to preschool, all on borrowed money, aren't rich, or even affluent. In truth, they are as poor as Job's turkey.

I can reasonably sympathize with this family because their job situations were out of their control. But I also agree that someone living in a half-million-dollar home, and obviously earning enough at one time to buy such a house, should have been better prepared for a downturn. That means having an emergency fund of 3 months living expenses, a LOT less debt, and more savings in general. The fact that she is being hurt by the equity freeze on a half million dollar house when they only had a 95K line of credit means they did not have a lot of equity, really, and they were already borrowing it.

In short, they were living too close to the edge when the edge moved in on them.

How about not buying your big-screen TVs and Hummers and remodeling your kitchen to look like the set of Emeril's cooking show? Tough times?

And my personal favorite:

It is raining and the bankers want their umbrella back.

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— Posted by Michael @ 8:02 AM


Stories like these crack me up. People get upset about losing money that wasn't theirs in the first place.


It wouldn’t surprise me if the next follow-up story we read is “Corazzi's File Lawsuit Against USAA Federal Savings Bank” – for lending the Corazzi’s the money. After all, the BANK should have known better, right? Those mean old bankers! Ugh. Somebody crack a window, I need some air.

** Comments Closed on this Post **

Thoughts on my personal finances, goals, experiences, motivations, and accomplishments (or lack thereof).

My financial life began turning around when I took responsibility for it.
— Dave Ramsey


Start (2005-12): ~$21,900
Currently: $0
[About Our Debt Paydown]


Savings Goal: $15,000
Currently: ~$15,115
[About Our Liquid Savings Goal]