Some large banking companies have responded to rising delinquencies and falling home values by freezing or reducing borrowers' home equity lines of credit, but TriCo Bancshares Inc. is reluctant to do so.
Though large lenders often extend home equity lines to people who live outside their markets and do their banking elsewhere, most of TriCo's home equity borrowers have checking accounts with the $2 billion-asset Chico, Calif., company, said Richard Smith, its president and chief executive officer.
"These are real customers," Mr. Smith said. If TriCo altered their lines, "we think that would be bad for the long-term relationships we have with our customers."
Community bankers across the country echoed those sentiments, saying they are not inclined to send notices cutting customers off solely as a result of falling home prices. Many also say that they have no plans to curtail home equity lending, and that they even see an opportunity to pick up business from large competitors that are scaling back.
Still, home equity lending is a far riskier business than it was during the real estate boom, and companies like TriCo are adjusting. This year it lowered the maximum loan-to-value ratio for new lines of credit by 5 percentage points, to 75%.
The $940 million-asset Peoples Bank in Newton, N.C., is also reducing the maximum for new borrowers, and it is asking some of its current ones to reduce their lines voluntarily.
"Home equities seemed like a great sector to be in until quite recently," said Matthew Anderson, a partner at Foresight Analytics LLC in Oakland, Calif. "Delinquency rates were minimal. But with the severe downturn in home prices and the sharp rise in foreclosures in many markets around the U.S., you're seeing increasing problems. So banks in general are trying to cut back on exposure before it gets worse."
Second-quarter home equity nonaccruals at commercial banks nationwide increased 165% from a year earlier, to $4.6 billion, according to a Foresight analysis of Federal Deposit Insurance Corp. data. The overall delinquency rate nearly doubled, to 2%.
Banks with more than $100 billion of assets had the sharpest increase in nonaccruals, 179%, and the highest delinquency rate, 2.2%.
Nonaccruals increased 101% for banks with $10 billion to $100 billion of assets, 124% for those with $1 billion to $10 billion, and 90% for those with under $1 billion.
Delinquency rates could get worse when aggregate data for thrifts becomes available. Foresight had not analyzed the second-quarter data for all thrifts, but it said the dollar value of home equity nonaccruals at the 50 largest ones grew 345%. Their overall delinquency rate more than doubled, to 4.1%.
Mark Fitzgibbon, the head of research at Sandler O'Neill & Partners LP, said that certain conditions, such as a decline in home values or credit scores, allow banks to freeze or reduce lines.
It's a step some large lenders have taken: Morgan Stanley cited those reasons when it froze several thousand lines this month. And last week Wachovia Corp. began notifying home equity customers whose property values had fallen 50% or more that their lines had been suspended or reduced. Kathy Harrison, a Wachovia spokeswoman, said it used an automated valuation process to identify those customers, who make up less than 3% of its home equity borrowers.
The Charlotte company could target properties where values have fallen by less than 50% later, Ms. Harrison said. "This is our first stab at it. Our competitors have been doing this for six months or so."
With the flurry of notices going out from so many lenders, the home equity crunch is getting more attention from the local media and even the Federal Deposit Insurance Corp. On Thursday, the FDIC published "
Mr. Fitzgibbon said he is not surprised that small banking companies are reporting fewer home equity delinquencies than large ones. "The one common theme is that the types of home equity that have been problematic have been loans that were out-of-market and broker-originated. By and large the stuff that's in-market and self-originated is doing reasonably well, and that generally is what you'd see from community banks."
Some community bankers also use technology to determine the collateral value on home equity lines, but other factors get more weight.
The $13.5 billion-asset Susquehanna Bancshares Inc. in Lititz, Pa., has not frozen any lines, because property values have generally held steady in its markets. David Becker, its director of consumer lending services, said he is in the "early stages" of thinking about what it might do if the default risk increased, though he doubts that it would automatically cut off borrowers whose property declined in value if, for example, their payment history is good.
"Some of the large banks have used a broad-brush approach: If you're in a declining market, they're going to rescind your credit line," Mr. Becker said. "As a community bank, I'm not sure we'd want to take that approach."
TriCo's Mr. Smith said that broad approach is bringing customers to companies like his. "It has created some ill will," he said. "Even in cases where we cannot provide them with a home equity line, we're still picking up their business, because they're upset with their bank."
Gary Cady, the president and CEO of Torrey Pines Bank in San Diego, said property values in his area have declined 25% to 30% in the past 18 months. Despite the drop, his $755 million-asset bank, a unit of Western Alliance Bancorp. in Las Vegas, had to freeze the lines of only two customers.
Torrey Pines' policy of never extending home equity lines for more than 75% of a property's value helped contain potential problems, Mr. Cady said. Still, falling home prices have impinged on loan-to-value ratios.
Over the past six months Torrey Pines has been reviewing all lines that are more than 75% utilized, he said. It conducts a "desktop appraisal" to determine if the amount borrowed exceeds 80% of the property's value. If it does, "it is our practice to then notify the borrower that we will be freezing the line."
Peoples Bank, like most other banks in its part of North Carolina, had been granting lines with loan-to-value ratios of up to 100%. But this year it capped the ratio on new lending at 89%.
It also asked some current borrowers to accept the lower cap, focusing on those with the largest lines. As an incentive, it offered rate discounts from an eighth to a quarter of a percentage point. But some readily agreed without any incentive.
Jim Perry, the retail banking manager at Peoples, a unit of Peoples Bancorp of North Carolina Inc., said it has "negligible" delinquencies and remains bullish on home equity lending.
He said the bank determined several years ago that its home equity borrowers had better household retention rates and more accounts than the rest of its customers. "Household retention is a major driver of profitability for banks, because it's so costly to go out and get new customers."
The $10.4 billion-asset TFS Financial Corp. in Cleveland also aims to increase its home equity lending, in its case despite higher delinquencies. By June 30 its nonperforming loans had increased 32% from Sept. 30, to $149.9 million, and home equity loans and lines of credit accounted for more than half the increase.
Monica Martines, a TFS spokeswoman, said borrowers are stressed by increasing unemployment, rising fuel and food prices, and deteriorating home prices that make selling difficult. But TFS — which caps the loan-to-value ratio on its home equity lines at 80% — is not viewing the sector as a trouble spot, Ms. Martines said.
"At this point we're actually growing the equity line of credit portfolio," she said. In the second quarter its home equity lending increased 21% from Sept. 30, to $2.27 billion.
