A few weeks ago "The New York Times" published an article "You thought you had an Equity Line" which detailed the practice of some lenders of "freezing" home equity lines of credit. Lest you think that your perfect credit and significant equity in your home will protect you from a bank taking such an action in your case, think again. Well known lenders such as IndyMac Bank, Greenpoint Mortgage and Washington Mutual have sent out hundreds of letters to borrowers resciding these lines of credit presumably in the hope that they (the lender) can protect themselves from future losses as property values plummet. A colleague of mine, upon receiving one of these letters sent out a broadcast to the company expressing complete bewilderment and dismay. The overriding sentiment from these homeowners seems to be "we've done nothing wrong, why are we being penalized?"
To add insult to injury, these actions are being taken even in areas where the value of properties has not declined and in some cases have even risen. Michael A. Kratzer, president of feedisclosure.com, states "the letters provide no explanation for how the lenders determined that the property values underlying the equity lines had fallen".
One of the other aspects of this (in my opinion) rash decision by lenders, is that consumers are not receiving refunds on what they were charged to put the loans in place initially. In some cases, a consumer may not have even used any of the loan but had it there for emergency situations or expected upcoming expenses.
"Credit Crunch" also now affects some student loans:
Similarly, On June 2, "The New York Times" reported that "Some of the nation's biggest banks have closed their doors to students at community colleges, for-profit universities and other less competitve institutions, even as they continue to extend federally backed loans to students at the nation's top universities."
By separating out the different types of institutions, the banks are again looking to reduce their risks. The feeling is that most graduates of four year universities are lower risk because the banks feel that the graduates of these institutions will more than likely earn more money and be able to pay back the loans.
Two familar names in the student loan world, "Sallie Mae" and "Nelnet" have confirmed that they will continue to offer student financial aid regardless of which type of institution is attended. The thing that has many people baffled about these lending institution decisions is that the government actually sets the standards for who can and cannot participate in a federal loan program. The Fed insures that colleges are "accredited" and have relatively low default rates in order to qualify for inclusion in the program. It's crazy to think that some lenders are being even more picky than the government!
Risk reduction-the new name of the game
The examples above are just two of many that are the new norm for life after the mortgage "meltdown" that seems to have left no stone unturned with it's pervasive effects on the market at large. Mortgage lending as well, is a whole new ballgame. Someone who purchased a home with an "exotic" mortgage two years ago might be hard-pressed to qualify for that same loan today. Lenders are being cautious, especially in cases where risk is perceived to be higher. For instance, if a borrower has a lower than preferred credit score, (risk one) and is putting down the minimum downpayment (risk two) and using and "interest only loan (risk 3) that borrower will now almost certainly have to pay more for a mortgage (if using a conventional mortgage) and even FHA has recently jumped on the "risk reduction" bandwagon announcing it will now have "risk based premiums".
Get your financial "ducks in a row"
I'll admit, this is scary stuff! Depending on your viewpoint this could either be the righting of a past wrong or just an overblown over reaction! Whatever your belief is, it is clear that things are changing and it would benefit us all to take inventory of our financial houses and find areas where we also can strive to reduce our "risks".