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Clients must pay off home equity loans first
By David Mildenberg
Bloomberg News
Published on Friday, Mar 07, 2008
National City Corp., one of at least 26 U.S. banks that pledged to help borrowers avert foreclosure, adopted rules that might block some of its customers from obtaining more affordable mortgages.
National City is telling clients with home equity loans they must pay off their balances before the Cleveland-based bank will let them refinance mortgages held by other lenders, according to a memo obtained by Bloomberg News. Home equity contracts often grant lenders the right to approve any new mortgage loans.
The policy, dated Feb. 18, might prevent borrowers from participating in programs to cut payments before they default. Regulators including Federal Reserve Chairman Ben S. Bernanke have called on banks to work with borrowers to slow the rise in foreclosures, which reached a record in 2007. National City is a member of ''Hope Now,'' the industry coalition designed to keep delinquent borrowers in their homes.
''This practice makes it more difficult for homebuyers to refinance and is very harmful for consumers,'' said George Hanzimanolis, president of the National Association of Mortgage Brokers.
The policy change reflects National City's decision last year to stop doing business with mortgage brokers and focus on home lending strictly through the bank's employees, spokeswoman Kristen Baird Adams said. The bank is the largest by assets in Ohio, which had the sixth-highest foreclosure rate last year, according to the research firm RealtyTrac Inc. of Irvine, Calif.
While the memo says there's no procedure for borrowers to seek exceptions, the bank is reviewing cases in which the inability to refinance would cause a hardship, Adams said.
The change concerns a practice known as ''subordination,'' in which a lender agrees to subordinate its claim on a property to a previously existing loan. Home equity loans or ''second mortgages'' have less claim than the original ''first mortgage'' that a borrower uses to buy a home.
Home-equity lenders have a legal right to demand repayment when a borrower seeks a new loan to replace their first mortgage. That demand was rarely made as housing prices rose, said Bill Cosgrove, president of the Ohio Mortgage Bankers Association.
The memo from National City Mortgage Corp. executive Terry McChrystal was an internal document that shouldn't have been made public, Adams said.
National City Corp., one of at least 26 U.S. banks that pledged to help borrowers avert foreclosure, adopted rules that might block some of its customers from obtaining more affordable mortgages.
National City is telling clients with home equity loans they must pay off their balances before the Cleveland-based bank will let them refinance mortgages held by other lenders, according to a memo obtained by Bloomberg News. Home equity contracts often grant lenders the right to approve any new mortgage loans.
The policy, dated Feb. 18, might prevent borrowers from participating in programs to cut payments before they default. Regulators including Federal Reserve Chairman Ben S. Bernanke have called on banks to work with borrowers to slow the rise in foreclosures, which reached a record in 2007. National City is a member of ''Hope Now,'' the industry coalition designed to keep delinquent borrowers in their homes.
''This practice makes it more difficult for homebuyers to refinance and is very harmful for consumers,'' said George Hanzimanolis, president of the National Association of Mortgage Brokers.
The policy change reflects National City's decision last year to stop doing business with mortgage brokers and focus on home lending strictly through the bank's employees, spokeswoman Kristen Baird Adams said. The bank is the largest by assets in Ohio, which had the sixth-highest foreclosure rate last year, according to the research firm RealtyTrac Inc. of Irvine, Calif.
While the memo says there's no procedure for borrowers to seek exceptions, the bank is reviewing cases in which the inability to refinance would cause a hardship, Adams said.
The change concerns a practice known as ''subordination,'' in which a lender agrees to subordinate its claim on a property to a previously existing loan. Home equity loans or ''second mortgages'' have less claim than the original ''first mortgage'' that a borrower uses to buy a home.
Home-equity lenders have a legal right to demand repayment when a borrower seeks a new loan to replace their first mortgage. That demand was rarely made as housing prices rose, said Bill Cosgrove, president of the Ohio Mortgage Bankers Association.
The memo from National City Mortgage Corp. executive Terry McChrystal was an internal document that shouldn't have been made public, Adams said.
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