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Originally published July 12, 2011 at 7:08 PM | Page modified July 16, 2011 at 10:02 PM

Nation's Housing

Homeowners fight to thaw bank freeze on equity line

Picture this nightmare financial scenario: You've taken out a $150,000 home-equity credit line to remodel your house, you've already pulled out thousands to pay contractors and owe thousands more, when suddenly you get a curt letter from the bank.

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WASHINGTON — Picture this nightmare financial scenario: You've taken out a $150,000 home-equity credit line to remodel your house, you've already pulled out thousands to pay contractors and owe thousands more, when suddenly you get a curt letter from the bank.

Effective yesterday, it says, we've shut down access to your credit line. Although we haven't physically appraised your property, an automated valuation indicates it is now worth significantly less than when we approved your application. If you wish to hire an appraiser, chosen by us but at your own expense, you can appeal our decision.

You're in shock. You can't pay bills you've already contracted for, you can't touch the money you confidently believed you had.

Plus you know that house prices in your area have been relatively stable since you took out the credit line. How could a bank effectively devalue your real estate using nothing more than a computer program?

Welcome to the world of what class-action attorneys estimate to be massive numbers of homeowners — 1 million customers at one national bank alone — who had their credit lines reduced, frozen or canceled without appraisals during 2009 in the tense months after the near-collapse of the capital marketplace.

Now a federal-district court in Chicago has given the green light to clients of JP Morgan Chase Bank to proceed with a consolidated suit alleging that their equity lines were yanked or reduced illegally, costing them billions of dollars in lost borrowing power. U.S. District Judge Rebecca Pallmeyer rejected the bank's motion to dismiss the case, clearing the way for a possible giant class action.

The litigation pulls together eight separate suits seeking class certification filed by homeowners in California, Minnesota, Illinois, Texas, Arizona and Ohio. It is considered a bellwether test of the rights homeowners enjoy under the Truth in Lending Act and state consumer-protection statutes when they take out equity lines of credit.

But it also shines light on the controversial computerized tools many lenders use to make quick, inexpensive assessments of property values in lieu of more costly professional appraisals.

Suits on similar grounds are pending against other major lenders, including Wells Fargo, GMAC Mortgage and Citibank, according to attorneys.

The lawyers not only are challenging JP Morgan Chase's legal right to rescind or limit credit lines without adequate documentation that property values have dropped "significantly" — as required by the truth in lending law — but are also mounting a side attack against automated valuation models (AVMs) they claim are frequently inaccurate and unreliable.

Steven Lezell Woodrow, a partner with Edelson McGuire, the Chicago law firm representing the plaintiffs, said the computer valuations used by JP Morgan Chase were found to be "grossly in error," based on subsequent physical appraisals.

Tom Kelly, a spokesman for JP Morgan Chase, said the bank does not comment on ongoing litigation. However, its filings in court argued that federal law does not specify the type of valuation technique lenders may use in reviewing equity-line collateral, and that the homeowners did not demonstrate the AVM values were incorrect.

The allegations in the consolidated suit include a credit-line suspension on a house in Mountain View, Calif.

Originally valued at $1 million and devalued to $826,000, a subsequent physical appraisal found the house had actually increased in value to $1.07 million. The bank later reinstated the owner's credit line.

On a house in Arlington, Texas, originally valued at $172,000, an AVM lowered that to $151,000. On appeal, the owner presented a physical appraisal completed 10 days before the bank's action that put its market value at $165,000.

Nonetheless, the bank refused to reinstate the credit line, based on a revised requirement lowering maximum loan-to-value ratios on total debt to 70 percent from the previous 80 percent.

Though the litigation will be contested primarily on the grounds of alleged violations of truth-in-lending procedures and state consumer-protection laws, the accuracy and use of automated valuations will hove in the background.

Leaders in the AVM field such as Tim Grace, senior vice president of CoreLogic, say "commercial-grade AVMs have proved over decades of testing to provide accurate, independent and consistently reliable estimations of property value."

But lawyers for the homeowners say nothing should distract attention from the context surrounding JP Morgan Chase's mass freezing of credit lines shortly after accepting $25 billion in emergency liquidity funds from the Treasury, which the bank has since repaid.

"They took the government's money, which was supposed to help them to lend to people who needed credit," said Woodrow, "but instead they cut them back."

Kenneth R. Harney's email address is kenharney@earthlink.net.

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