WaMu reduces equity lines to the tune of $6 billion
Readers, I’ve actually been waiting for this moment to come. Well before I was a mortgage originator, I secured my first equity line against my primary residence. I wanted to know everything about these things called equity lines, so I read every piece of paper the bank gave me. In so doing, I came across a particularly onerous clause that made the loan “callable” by the bank at any time. The reduction in outstanding equity line balances by WaMu, Countrywide, and others is only a reflection of this. It hasn’t gotten to the point yet where they are demanding that outstanding balances be reduced, but they are freezing and reducing available credit left on the lines.
Callable loans are one of the contributors to the Great Depression. Banks don’t like to lose money, and one way they could compensate for risk and for losses being experienced in the stock markets was to call their cash back in. So, lenders started issuing 30-day notices to homeowners demanding that they pay their loans in full or face foreclosure. Because of this, first mortgage loans are no longer callable but equity lines ARE. So, my advice to clients with equity lines (or who are considering equity lines) is to completely max out the available credit limit and invest the difference that they don’t need right now (this form of investing is called arbitrage - borrowing at one rate and investing at another). As I said, so far lenders are not calling balances due but as we’ve all come to understand over the last year, times can change very quickly!
Please feel free to e-mail or post with any questions or comments. Has anybody had their equity line “modified” yet?
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