Last January, KeyBank, a major lender, announced that it was departing the home improvement business, effective immediately. For K-Designers, a California-based siding and window company doing business in 18 states, it was a shock. Company founder and president Larry Judson says that 74% of K-Designers' jobs are financed, and KeyBank was its biggest lender.

SHIFT TO SMALL TICKETS With prices falling sharply in some areas, homeowners find their equity diminished. Companies that relied on refinancing, home equity loans, or home equity lines of credit — all used to finance home improvement projects, especially larger-ticket projects — have had to find other ways to get customers' jobs financed.

“Homes are worth less than they were two years ago,” says Kermit Baker, senior research fellow at the Joint Center for Housing Studies at Harvard University. “So even if your credit is great and the lending company has the money to lend, is there the underlying equity in the home to support the loan?” With many homeowners having already tapped into their equity, the answer often is no.

“In the Midwest, we felt the crunch a lot sooner,” says Seth Cammeyer, president and CEO of ImproveIt Home Remodeling, in Columbus, Ohio, also a customer of KeyBank. “Home values were sliding, discretionary income was shrinking, and credit quality was decreasing.” ImproveIt, Cammeyer says, made a strategic shift from high-ticket items, such as sunrooms, into windows, siding, and gutter protection jobs, which can be affordably financed by unsecured loans at somewhat higher interest rates. This year the company, with 85% to 90% of its jobs financed, has seen no increase in credit rejects.

UNSECURED ALTERNATIVE Judson says that it took K-Designers 90 days to find the lenders to make up for the loss of KeyBank. Fewer companies now lend to the home improvement industry, according to Bruce Christensen, vice president of GE Money, a major lending source. And the kind of lending they do has changed.

This year, GE Money not only tightened up on lending standards but opted to offer only unsecured financing. “With a secured loan, you're lending on the basis of the value of the property. On the unsecured side, you make the loan based on the creditworthiness of the consumer.”

But smaller loans “affect the psyche as much as the pocketbook,” points out Mark Richardson, president of Case Design/ Remodeling, a remodeling and handyman company in Maryland, who is also on the home improvement advisory board at GE Money. “If you have a yearning or desire to do something, and you find out that you can only borrow $20,000, you think: Maybe I shouldn't be doing anything.”