Morgan Stanley (MS) has gone to some of its private clients and told them they cannot borrow more on their home equity lines of credit. The customers thought they had signed up for the deals so that they would have money to access in the future when they needed it for things like college education or a new yacht. The brokerage house reasons that many of the homes belonging to these people are not worth the value of the mortgages. That would make the secondary loans on the properties pretty risky.

According to Bloomberg, “The New York-based investment bank will review home-equity lines of credit, or HELOCs, monthly from now on.” That means that the number of people who can use the facilities will drop, at least for the rest of this year.

There was a time when a home was a man’s castle and also his piggy bank. Morgan’s action is likely to start other financial companies looking at similar measures.

It is hard to blame Morgan from protected itself since its own credit management has almost wrecked the company by failing to spot dangerous pools of risk. Why should it let its clients make that worse?

The by-product of the action is that it will take more consumer liquidity out of the market. Money that might have been used for home improvements, cars, school costs, and the purchase of consumer durables is disappearing.  The overall economy is getting another tap on the brakes.

Home equity was one of the last big lockers of consumer capital. Wages are not going up. The cost of credit card debt is rising. The value of houses and stocks is going down.

The man on the street has watch his pockets get emptied, and now he is being told that the last asset he has is nothing more than a roof over his head.

Douglas A. McIntyre

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