Business Times: Morgan Stanley freezes clients’ home equity credit lines

SUB-PRIME CONTAGION

(NEW YORK) Morgan Stanley, the second-biggest US securities firm, told several thousand clients this week that they won’t be allowed to withdraw money on their home equity credit lines, said a person familiar with the situation.

The action mostly affected clients with properties that have lost value, according to the person, who declined to be identified because the information isn’t public. The New York- based investment bank will review home equity lines of credit, or HELOCs, monthly from now on, the person said on Tuesday.

Wall Street firms including Morgan Stanley are ratcheting back on risks after the collapse of the sub- prime mortgage market and ensuing credit contraction saddled banks and brokerages with almost US$500 billion of writedowns and losses. Consumers fell behind on home equity credit lines at the fastest pace in two decades in the first quarter, the American Bankers Association reported last month.

‘Consistent with the terms of the HELOC, or home equity line of credit, Morgan Stanley periodically reassesses client property values and risk profiles,’ said Christine Pollak, a Morgan Stanley spokeswoman in New York, on Tuesday.

‘A segment of clients was recently notified of a change in the status of their HELOC due to a change in the value of their property and/or their credit profile.’

Ms Pollak declined to specify the dollar amount of the frozen credit lines. The firm’s global wealth management division, which doesn’t disclose how many clients it serves, had 8,350 advisers managing US$739 billion of customer assets at the end of May, according to its second-quarter earnings report.

Morgan Stanley has already taken about US$14.4 billion of losses related to leveraged loans and collateralised debt obligations (CDOs).

The clampdown on home equity loans mirrors similar efforts by commercial banks, said David Hendler, an analyst at Credit Sights Inc in New York.

‘All consumer lenders and home equity lenders are reassessing the environment, given the pressure on housing and the economy,’ Mr Hendler said.

Source: Business Times – 07 Aug 2008