Dear Customer: It's Over. With Love, Your Bank 

Banks freeze home equity lines of credit in the latest fallout from the sub-prime mortgage crisis.

Marcos Mariscal's house was torn down to the studs when he got the letter. The 44-year-old postman was in the middle of an extensive remodel of his two-bedroom, one-bathroom house in Palo Alto earlier this year. To pay for the $170,000 in home improvements, Mariscal was planning to rely on a type of loan that used the value of his property as collateral, so-called home equity lines of credit. Back in April 2007 when he refinanced, his house was worth $625,000.

Not one year later, his bank, Chase, notified Mariscal that the home values in his neighborhood had plummeted, and, as a result, the value of his home would no longer support his line of credit. Based on their appraisal, the value of his house had dropped to $489,000. "Therefore," it read, "We are suspending your account immediately."

John Gillespie of Alpine Mortgage, Mariscal's mortgage broker who first suggested he get the financing, recalls getting the phone call from his client that day. He had no idea that his house had dropped so much in value and was understandably shaken by the notion that he would not have access to the cash that he was relying on to renovate his house. In addition, he had already spent his savings and was using the line of credit as a last resort — a last resort that he now desperately needed. "My first thought was that if this doesn't work out, I'm going to lose everything that I've had for seventeen years," said Mariscal.

Home equity lines of credit have long been appealing to homeowners looking for instant-access rainy-day funds because of their typically low interest rates. Unlike other credit, home-equity lines allow borrowers to "pay as you go," meaning that customers only have to pay the interest once they start withdrawing funds. As long as the value of the property stays even keel or increases, home equity acts as a dependable form of financial backup.

But when the housing market took a downward plunge in recent months with property values plummeting and owners defaulting on their mortgages, banks began tightening restrictions on such lines of credit. Banks had prepared for such an occasion by stipulating in the terms that they can renege on the deal if the value of the house falls significantly below its appraised value. In other words, banks are saying that when the going gets tough, we're outta here.

Nationally, major banks such as Citibank, Bank of America, Countrywide Financial Corp., Washington Mutual Bank, and USAA have made similar announcements about cutting back their home equity lines of credit. And the Bay Area is no exception.

Oakland resident and real estate investor Steve Edrington also recently received a letter from his lender, Citibank, just after he had written a check to help pay for a construction project. Luckily, Edrington had some reserve cash and was able to run to the bank (literally) that very same day to avoid massive fees for overdrawing his account. "I think the era of tapping into our house as a piggybank is over," said Edrington. He's now looking for a new line line of credit, but so far, the search hasn't been easy.

Even homeowners with good credit ratings are being affected. Though Edrington says he has a high credit score, his rating had no bearing on the freeze — and will not be affected.

"I call it the trickle-up effect," said Corey Wilson, a mortgage broker with Princeton Capital in Orinda. "This whole thing that started last spring is affecting everybody, including the best borrowers."

So just how are banks determining the value of homes in the first place?

A Citibank representative, Mike Rodgers, says the company uses an automated appraisal system to monitor its customers' home values, but wouldn't reveal what those programs are. Such programs, like Zillow.com, account for the age of a house, square footage, and recent comparable sales within a certain radius.

Edrington calls the process is "inherently flawed." "The problem is the system doesn't allow for other variables like freeways or other neighborhood divisions, views, or custom-built homes," he said.

For instance, in a neighborhood like Rockridge, property values change dramatically from one block to the next. But the computerized system would lump all of those values into one when considering the overall neighborhood.

When Edrington called Citibank soon after receiving the letter to ask them what the new value of his property was, he said they said it was much lower than what he thought it was worth. "The truth is that unless you go out there and look at it, you won't really know the true value of a property," Edrington continued. But he said Citibank told him he would have to pay up to $600 for one of their appraisers if he wanted to verify the amount.

In an e-mailed response, Citibank representative Mike Rodgers said its home appraisals follow "standard industry practices" that are "consistent with safe and sound banking practices."

Rodgers declined to comment on how many customers have been affected by the suspensions, but he also said that "if a customer believes that we have made an error in calculating the value of his/her home, we have an appeals process in place."

Mariscal says he didn't have a choice; he had to appeal the freeze or risk foreclosure. "So we did the only thing we could do at that point: we begged," said Gillespie, Mariscal's mortgage broker.

Mariscal sent a letter to Chase, along with pictures of the demolished remains of his house. "As you can see, my home is uninhabitable in its current condition," he wrote. "If Chase continues suspending the credit line my family and I will be stuck. We will be unable to complete the project, and unable to move back into our home."

The evidence they sent was convincing enough to do the trick. Within 48 hours of his appeal, Chase agreed to allow Mariscal to keep his line of credit, precluding him and his family from likely losing their home to foreclosure. But others may not be so lucky.

Despite interest rate cuts from the Federal Reserve Bank, large banks all over the country continue to hedge their losses by tightening loan restrictions. But surprisingly, many lenders are still vying for new customers. Oakland resident Benjamin Scott says that even though he received a letter from his bank six months ago telling him his home equity line had been frozen, he still receives ads in the mail — mostly from Citibank — suggesting that he open a new one.

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