Just a few of the mortgage companies who have restricted access to established home equity lines of credit include Countrywide, Bank of America, and USAA Federal Savings Bank. Countrywide has cut off 122,000 of its customers, while USAA has begun with 15,000. Bank of America has recently also begun contacting homeowners to inform them that they will not be able to use the credit lines.
These types of loans usually do allow for the lender to cut them off for period of time or suspend access if the home value drops, but few of the debtors ever read these complicated mortgage contracts. Few enough of them read the documents for their first mortgages, and most believed that the home equity line of credit could act like a credit card. Cutting off the owners' access to the accounts will contribute to more foreclosures, though.
Most importantly, some homeowners are currently using these credit lines to get them through a temporary financial hardship. With recession looming in the economy, jobs and wealth may begin to disappear at increasing rates. Homeowners who lose a job or face a similar financial crisis will not be able to borrow from their home equity in order to get them through the rough patch. This, in turn, will make it that much more likely that they will end up in foreclosure sooner rather than later.
But the lenders are also in a losing situation. If they keep the credit lines open, homeowners may be able to get through a temporary setback and keep on top of their housing and other bill payments. But if the situation involves a permanent decrease in income, the homeowners may just use the credit line to prolong the inevitable, borrowing as much as possible before they eventually lose the home anyway. In this case, the mortgage company holding the home equity line of credit will most likely not be able to recoup any of their losses from the sheriff sale.
So banks are stuck with the choice of leaving the lines open in the hopes that homeowners will use them to overcome a financial hardship, or closing them in order to prevent even greater losses through foreclosure. By keeping the lines open, they risk even greater losses as homeowners use the money to get ahead of the foreclosure and never intend to pay it back. By closing them, the banks are almost guaranteeing that some owners will quickly fall into foreclosure. Neither of these choices are easy, and it seems that the lenders have decided to reduce their exposure as much as possible by restricting access.
This indicates that the banks believe that there is worse to come in the economy and that home values may not recover for some time. These borrowers may never be able to get access to their equity lines, and ones who have used up much of the credit will not be able to sell their homes because they owe more than the home is worth. Thus, in order to limit their own exposure, banks are locking homeowners out of their credit lines while locking them into mortgage payments that they will never be able to make for the long term on houses that will not be worth nearly as much as they were during the bubble.