More Banks Suspending HELOCs

During the Great Housing Bubble a home equity line of credit somehow became synomous with an emergency fund. One never had to worry about saving on their own - their house was doing it for them. People could buy a house and open a HELOC even if they had little or no equity. It was believed that housing prices only went in one direction - up. Today's feature is an article from Smart Money about more HELOC lines getting suspended. From the article -

TERI GRUBAR, a 46-year-old small-business owner in Minneapolis, isn't the type to pay a bill late or bounce a check. So when the owner of the tree service she had hired to spruce up her yard rang her bell earlier this month, angrily waiving a letter stating that her $3,000 check had bounced, she knew something was wrong.

A call to Citibank threw her into further disbelief: Her home equity line of credit, or HELOC, which had $20,000 in it for the occasional home repair or cash emergency, had been closed. It wasn't her fault. As the bank explained in a notice she received a few days later, her account was suspended because her home value had "significantly declined."

"This has affected me financially and emotionally," she says. "I'm self-employed and sometimes it can be a couple of months before I receive payments. Now I've got nothing to fall back on."

The lenders are obviously in a bind - if they notify people that their lines are going to be suspended most consumers would run and take out every penny. If banks close the lines than notify the borrowers you have cases like this where a check bounces and create alot of additional problems.

Also notice this borrower considered their HELOC as their emergency fund - money to fall back on when times are lean. For people who really have emergency funds - is hiring someone to spruce up your yard at $3000 really an emergency?

The article end with the same advice as all of the rest of these articles usually do. First fight the lender - get your own appraisal to prove you do still have untapped equity. Second shop around for a new HELOC. And of course, the most financially responsible one -

If you're worried that your lender may close your HELOC and you know that you'll need the money, it may make sense to tap the line now and deposit the cash in a high-yield savings account. Just keep in mind that most savings account yields have dropped dramatically so that money won't grow by very much while in the account. Also, don't forget that you're putting your home up as collateral, says Gerri Detweiler, a credit educator and author of "The Ultimate Credit Handbook." So you should only do this if you're certain you won't suffer a loss in income that may prevent you from making loan payments.

It seems a bit strange that a decent financial adviser would encourage people to take on additional debt based on housing when article after article depicts this as the worse housing crisis since the Great Depression. In some areas the devastation is already worse than the Great Depression averages.