It wasn’t that long ago that mortgage lenders were eager to extend credit lines to anyone with a pulse and a property title. Alas, the industry’s mood has turned with the swooning of housing prices: frugal caution has displaced wild abandon. Many homeowners, unaware that their lines of credit could be curtailed summarily, have been unpleasantly surprised.
Countrywide Financial, infamous for its subprime loan exposure, led the way by freezing over 100,000 home equity lines of credit (HELOCs); in many cases, the borrowers were not delinquent, but their levels of home equity had dropped due to price declines. Countrywide’s new owner, Bank of America, followed suit, as have Citibank, Washington Mutual, J.P. Morgan Chase, and others. In some cases, the banks appear to be freezing lines of credit en masse and only confirming after the fact that specific borrowers have experienced equity declines severe enough to justify shutting off their credit.
If your HELOC has been frozen you should receive notification from your lender. It’s a judgment call as to whether you should bother to pursue an appeal; certainly you should do so if you need access to the funds. Check with the lender to determine whether it requires a formal appraisal to reopen the credit line. This could cost you a few hundred dollars, and in some instances banks have been accepting real estate brokers’ assessments of values rather than requiring a true appraisal.
Before paying for appraisal, you should identify all your options. Has the value of property in the area really declined so much that your equity level might be in doubt, or is the bank just being overcautious? If it’s the latter, and if you have other gripes with your current lender, you may want to consider refinancing with a different bank. If you belong to a credit union or are eligible to join one, you may find one willing to refinance an existing HELOC. Obviously, this approach won’t work if your equity has truly evaporated.
If you established a HELOC to pay for an upcoming expense (a renovation, for example) and have not experienced a freeze, it might be a good idea to withdraw the funds needed now, while the line is still open. Banks are becoming more jumpy, and further freezes might be on the horizon. The Wall Street Journal recently carried a story about homeowners who started renovations only to find that their HELOC checks began bouncing in the middle of their projects.
There is a possibility that massive HELOC freezes will abate soon; housingwire.com reports that the FDIC has been issuing warning letters to banks about freezing credit in situations where there has not been a “material change,” like a significant equity decline or the loss of a borrower’s job. Such freezes may violate the Truth in Lending act. Obviously, a great deal depends on the direction of local housing markets, as banks are increasingly zealous to shield themselves from additional real-estate related risks. If you live in an area that is experiencing significant price declines and/or your HELOC was based on a marginal level of equity to begin with, you’re at an elevated risk for having the equity tap shut off.
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