links for 2008-04-13
Theda Skocpol Is Shrill!

New York Times Death Spiral Watch: Tanta of Calculated Risk Is Extremely Unhappy

Downright shrill. It is Gretchen Morgenson on home equity lines:

Calculated Risk: HELOC Nonsense: [Morgenson's] whole article... depending on Kratzer's unsourced assertion of "common fees" and his innuendoes about lender valuations... begs the question: this is "unfair" because the equity is there, even though the lenders say the equity isn't there. There isn't one homeowner quoted who actually got an appraisal or AVM that shows something other than the bank's valuation. Kratzer seems to think the bank is obligated to pay for a new appraisal and send you a copy when they lower your line limit. For him, I got bad news: that would, indeed, bring average closing costs on HELOCs up to 300 bps....

Claiming or implying that the only reason a lender can or should reduce or freeze a HELOC is when the borrower's ability to repay has changed is not just a total misunderstanding of federal banking regulations, it's dumb. The "HE" in "HELOC" stands for Home Equity. This is not just any old revolving line of credit, it's secured credit.

If you have problems with paying a grand or two for a line of credit you may never use, I suggest not doing it. If you wish to consider that you paid an option fee and your option expired, well, you can feel like one of the professional hedgers. If you think any closing costs you paid should be refunded to you because you're now "out of the money," I posit that you do not understand finances enough to get quoted in a newspaper.

Why do banks reduce or cancel home equity lines rather than just raising the interest rate? Because they fear that the borrowers who will stick around at a higher interest rate are just the guys the bank will ultimately end up losing money on: bad risks.