Lenders freeze credit lines

House on calculator

A growing number of banks are telling customers they can't borrow any more money against their home equity lines of credit because of falling home prices.

Countrywide Financial was the first to do so, sending letters to 122,000 homeowners across the country.

Since then Chase, Bank of America, Washington Mutual and USAA Federal Savings Bank have also frozen home equity lines for some customers.

Until the mortgage crisis struck in early 2007, lenders were willing to allow homeowners to borrow up to 100% of the assessed value of their homes through a first and second mortgage.

That seemed like a reasonable thing to do when home prices were increasing at astronomical rates.

But over the past year, home prices have stagnated or fallen in many cities, with parts of California, Florida, Arizona and Nevada experiencing significant declines of 10% or more.

That has banks and mortgage companies worried that the homes that serve as collateral for their loans could be worth less than their owners now owe.

As a result, most lenders now limit total mortgage debt to 80% of a home's value.

But at least home equity rates are falling, and the average home equity line of credit now costs less than 6.5% -- the lowest since July 2005.