Mr. Mortgage reports:

“The rub here is that Wells ALREADY switched the terms to the 10.13% and the only way out is to ‘decline’ the offer by March 15th. It is very confusing. Of the hundreds of thousands of these that Wells may have sent out, how many will go unattended to? My guess is a large percentage. In the next statement that comes, these borrowers will see a payment increase of 150%! Think that may lead to some HELOC loan defaults? This is radical. This does not lead to warm and fuzzy feeling for the bank.”

Unfortunately, this is likely to come as a huge shock to a lot of faithful borrowers. It sounds like this notice is easy to mistake as a credit card offer or other junk mail item, when it is actually going to have a big impact on the recipient.

For most, HELOC rates are extremely low right now. But, like everything else during the past 12 months, this proves that nothing is guaranteed.

photo credit: RomanKetchup

See Also:

How to Negotiate the Best HELOC Rates

10 Most Important Questions to Ask Your HELOC Lender

The New York Times reports:

“The Fed said in a statement that, because of weakening economic activity, it had cut the Federal funds target rate by half a percentage point, to 1.5 percent. It also cut its discount rate by the same amount. The vote was unanimous…

Federal Reserve officials said Wednesday’s action was the first time ever that the Fed had coordinated a reduction in interest rates with other central banks, though the United States has periodically joined with other countries to intervene in currency markets to stabilize foreign exchange rates.”

Major banks including National City, Wells Fargo, and Wachovia followed suit by lowering their prime lending rates to 4.5%. The prime rate is the rate that is given to the most credit worthy borrowers.

For more information on how this may affect you see: Will Federal Rate Cuts Affect Your HELOC APR?

Now it’s  looking like only a handful of major HELOC lenders will come out of this. The next time you go to take out a home equity line of credit, you may have to choose from five massive lenders rather than twenty or so.

Just recently, MarketWatch reported that Wachovia is in serious negotiations with Wells Fargo. They explain:

“Wachovia Corp. was in advanced discussions over the weekend to sell itself to Wells Fargo & Co.

The Wall Street Journal reported Monday, citing a person familiar with the situation. Wachovia also held talks with Citigroup but by late Sunday Wells Fargo appeared to be the preferred bidder…”

What happens with these banks and the proposed bailout is yet to be seen. However, it is clear that a massive consolidation process is taking place between the nations largest banks.

See Also: 

Who’s to Blame for the Home Equity Crisis?

New WaMu CEO Faces $60 Billion in Home Equity Loans

ReportonBuisness.com explains:

“Wells Fargo owns a huge pile (almost four times its total capital) of Home Equity Lines of Credit, or HELOC loans. HELOCs are second-lien loans, meaning they rank behind the mortgage on the house, and if the mortgage is under water, then the HELOC is only worth whatever is left after the bank holding the mortgage gets paid in full.

Up until April 1, if a HELOC was 120 days behind in its payments, Wells Fargo would write off the loan. After that date they changed their policy, only writing off the bad loans after they are 180 days in arrears. In effect, they decided to pretend that bad loans were good for an extra 60 days. If they had used the old rules, their earnings would have missed analysts’ estimates by more than they beat them by using the new method.”

It’s certainly an interesting accounting trick. However, lenders can’t hide HELOC losses forever.

See Also:

Congressman Questions HELOC Freeze Lenders

Wells Fargo Experiences Home Equity Line Losses

Market Watch reports:

“Within Wells Fargo’s $84 billion home equity portfolio, 2.11% of loans had two or more payments that were late at the end of June. That’s up from 1.86% at the end of March.

 

The bank separated some of the worst-performing parts of its home equity portfolio earlier this year and plans to slowly liquidate them. This $11 billion portion had 3.6% of loans with two or more payments past due at the end of the second quarter. That was up from 2.79% at the end of the first quarter.

 

“Given the continued decline in home prices, we had more accounts move into the higher combined loan-to-value segments, which directly impacts loss levels,” Loughlin explained.”

Over two out of every 100 Wells Fargo customers has had two or more late payments between the beginning of April and the end of June. Wells Fargo has frozen or reduced many home equity lines to mitigate loss. But, many customers have already withdrawn an amount greater than the current value of their property.

See Also:

Congressman Questions HELOC Freeze Lenders

HELOC Lenders – More Unpredictable Than Ever

“Rates are at their lowest levels in over 3 Years — there’s never been a better time to apply.”

That may be true for borrowers who have excellent credit, hold significant equity, and live in areas with stable home values. But, I’m afraid those who don’t meet these requirements won’t get the lowest rates in three years. They’ll be lucky if they can find a HELOC lender offering a loan with any rate.

For those who do meet the new, more stringent guidelines, there are some benefits to taking out a HELOC now. In addition to low rates, Wells Fargo is offering loans with no bank closing fees and a quarter point rate discount for customers making automatic payments.

See Also:

The Best HELOC Lenders Ranked

Representative Dennis Kucinich called the HELOC freezes “very disturbing.”

“People have had their home equity lines suspended whether or not their credit is good or not, and whether they have sufficient equity in their houses, or not,” he said. “As Chairman of an investigative subcommittee in Congress, I can get answers from the banks.”

The Domestic Policy Subcommittee sent letters to nine major lenders including AmTrust, Keycorp, National City Bank, Charter One Bank, Wells Fargo, Fifth Third Bank, Huntington National Bank, CitiFinancial and JPMorgan Chase Bank. They may send additional letters to other lenders.

The letters ask some tough questions such as:

“If your institution has already notified borrowers of your intent to restrict HELOCs, what were the criteria you used to identify recipients of that notification? How many borrowers received such notifications, and where were these borrowers located, by zip code? Please also provide a copy of the notification and any attachments. What is the nature of the restriction?”

If your institution has initiated or is considering a restriction in home equity lines of credit, tell us what basis for assessing housing values of your borrowers are you using specifically for the purpose of evaluating HELOCs? If this is a proprietary source, please explain the methodology and the name of the vendor

What other loan products has your institution restricted, or is your institution considering restricting, and what steps, if any, has your institution taken in this regard?”

Since most HELOC loan documents include language that allows for limit reductions, it is unlikely that the sub-committee will uncover evidence of illegal actions. However, it will be interesting to see what information lenders release. Up until now, HELOC freeze statistics and methods have not been widely available.

See Also:

HELOC Lenders – More Unpredictable Than Ever

List of Lenders Sending HELOC Freeze Letters