Erosion Of Equity
By Joyce Moed

SAN DIEGO - First it boomed. Then it crashed.

The real estate market–especially in Southern California, Las Vegas and South Florida–rollercoaster has caused an erosion of the equity many people had in their homes. And those homeowners have experienced a thriller ride watching the value of their homes sharply appreciate, which allowed them to borrow at the lower rate that comes with home equity, and then a downward spiral that led to a crash in home equity.

Financial institutions of course had already extended open-ended credit to many homeowners based on the equity in their homes. These financial institutions are now faced with the question of how to handle these credit lines.

"One of the first things we did was a review of property values for all of our home equity lines of credit," said Julie Bennet, lending manager at Cabrillo Credit Union here. "We pulled a robust AVM product for all outstanding HELOCs. Our policy allows for 80% LTV on HELOCs."

This gave the credit union a little cushion, Bennet said.

"But we are still seeing property values dropping 20% or more in some areas," she said. "After the review we found that many were well over 80% LTV."

Cabrillo CU blocked the credit lines on those accounts and sent letters to its members informing them of this, Bennet said.

"I think it was expected by most members as we did not receive much negative feedback," she said.
Before the drop in housing value, Cabrillo CU was offering interest-only and traditional HELOCs.
"We are now only offering traditional," Bennet said. "We have taken out the interest-only product."

Golden1 Credit Union in Sacramento is continuing to monitor its equity loans, said Curtis Dair, SVP of lending.

"We’ve tightened our guidelines to really protect ourselves against the declining market," he said, "but we are still writing home equity loans."

"We also want to protect our members to not put them in a position of overextending themselves," added Donna Bland, SVP and CFO. "We are looking at our current loans and if market rates have gone down, maybe we will reduce limits. We want to protect our members to not put them in a position of overextending themselves."

"I do think it’s in the best interest of members to not place them in a position of borrowing more than they should, Dair agreed.

To compensate, Bland said, there are many alternatives to an equity line.

"There are still very good auto rates," she said. "And there are personal loans and credit cards. We will also work with our members to do an analysis of their specific home."

Tom Ernsperger, SVP, loan administration for Nevada Credit Union in Las Vegas, said that his CU is "faring quite well."

"Our home equity loan portfolio has traditionally featured more closed-end second-mortgage loans than HELOCs," he said. "In the case of our closed-end loans, we never got involved in the high loan-to-value craze of a few years ago. Thus, while we have not been immune to the effects of the local economy, even with the reduction in local home values, we find most of our loans continue to perform well with adequate collateral value."

Like Cabrillo Credit Union, Nevada Credit Union has been reviewing its current HELOC lines.
"However, we have found the overwhelming majority of them continue to perform well, regardless of their current property value," Ernsperger said. "The index to which our HELOCs are tied has not been as volatile as the index to which many other adjustable-rate first-mortgage loans have been tied, which has helped these borrowers avoid drastic payment changes."

Ernsperger said the CU has seen a decrease in the number of requests for HELOCs as people may be realizing their property values may not support such loans at present.

City County Credit Union in Fort Lauderdale has more than 1,100 HELOCs with balances, said Lloyd Gill, EVP, COO.

"While we have had very minimal delinquency in our HELOC portfolio, we have decided it would be prudent to undertake a review of all open lines to determine our exposure, if any," he said.

In addition, City County CU mailed all members with a real estate loan detailed information about assistance available, including credit counseling programs and loan modifications, Gill said.

"We are undertaking a manual review of every HELOC," he said. "This includes a review of current property value and a credit bureau report."

When this is complete, the CU will determine what course of action to take, Gill said.
"This may include reducing credit limits in cases where the LTV is excessively high," he said.