National City: Paying Customers To Close Credit Lines Smacks of Desperation

National City Bank is desperate for capital. Evidence can be found in the Financial Times story National City offers cash to cut equity lines.

National City (NCC), the US bank that has been among the hardest hit by the subprime crisis, is trying to reduce its exposure to the riskiest category of home loans by offering customers cash to close their untapped home equity lines.

Lenders such as National City have tightened their lending standards and reduced lending volumes sharply, but portfolio exposures could still grow as a result of so-called “open-ended” home equity lines that are committed but as yet undrawn. The bank’s initiative, which was launched at the end of July, encourages National City customers to surrender their unused home equity lines by waiving fees it would normally charge for closing the line and by writing customers a $200 cheque. ...

The bank’s customers are normally charged up to $350 to close a home equity line.

Some banks, such as Bank of America (BAC), Wachovia (WB) and Chase, have frozen borrowers’ access to home equity lines or changed the terms to reduce their potential home equity exposure.

That someone should ever have to pay $350 to close a credit line is of course completely silly. But it is very telling that NCC is willing to pay customers $200 to not tap those lines. I don't doubt that most customers are pleased by this.

Interestingly, questions about Home Equity lines came up last night on Coast to Coast Radio. A caller asked about tapping credit lines for investment and I commented that it would not be advisable because rates of return would likely be far too low given rising unemployment, massive overcapacity, and the unwinding of credit bubble. I did go on to say that if he still wanted to do it, he better hurry or that line would be shut.

Bank of America, Wachovia, JPMorgan Chase (JPM), Citigroup (C) and others have all acted to reduce credit lines.

National City (NCC) is the first bank to pay customers to close those lines. National City is short of capital. There is no other realistic way to look at it.

Comments

[helplessobs...:]

These are strange times. I think you will be seeing lenders letting borrowers become "house sitters" and may even pay them to stay in the lender's house. A vacant house deteriorates rapidly and with no ready market, it makes sense to keep it occupied. A few foreclosures can be handled, but a tidal wave requires new thinking.

2008 Sep 04 10:54 PM

[User 256237:]

Your conclusion regarding NCC's capital is short sighted at best, and smacks of irresponsibility and sensationalism. The Bank's $7 billion dollar capital raise has left it with the highest Tier 1 capital ratio, a measure of the banks liquidity, of all large banks in the country.

The volitility in the financial services sector in general, and within NCC specifically, is largely a result of the difficulty banks have had in providing accurate forecasts of loan losses. By actively reducing the bank's real estate exposure they will better be able to identify trends and project losses, not to mention reducing the risk of additional losses as consumers tap credit lines to stay afloat.

2008 Sep 05 07:36 AM

[Allron:]

Ifeel that your degrading due dilligence on NCC only
sets up a better future for the soon to be offers to purchase this entire chain, at a bargasin price. Think Barclays, Bank of Nova Scotia, or even J.P. Morgan Chase will offer no less than $40.00 per share. My suggestion,(Contrary to all Financials Opinions) is BUY ALL YOU CAN WHILE IT'S CHEAP.

2008 Sep 05 10:08 AM

[Metzenbaum ...:]

Speaking of HELOCs and investing, how much HELOC cash is there in the market, anyway?

2008 Sep 05 10:45 AM

[sumosama:]

disclosures???

2008 Sep 05 12:20 PM

[sumosama:]

Many lenders are closing lines without notice or compensation. I am sure there is a good business case for doing this proving $200 is a small price to pay for reducing contingent liabilities.

BTW, most HELOC's come with a penalty for early closure.

Why do I read this guy's stuff???

2008 Sep 05 12:21 PM

[JoeConsumer:]

There is no question that National City Bank (NCB) is doing all it can to reduce its home equity credit line losses and minimize risk. A highly credible National City customer recently reported that NCB held his Mortgage Line of Credit payment for almost a month so it could say the payment was late and immediately terminate his line of credit. The customer said he will fight it. It makes us wonder if this is an isolated case or a new tactic to reduce mortgage lines of credit from NCB's portfolio.

2008 Sep 23 01:36 PM

[BankWatcher:]

You, sir, are a moron.

2008 Oct 02 10:47 PM