More HELOC Fun

A very informative article appears in CNN Money that explains how to thaw a frozen line of credit and what exactly happened to cause the lines to become frozen. With article after article involving irate people giving the impression that the lender was taking their money when HELOC lines were shut down. The articles clear explanation that HELOCs are equity and a lender does not, and probably will not, have to loan out more than 80% of the loan-to-value ratio. Equity is not a set, guaranteed amount and it can fluctuate both up and down.

... At worst, outright freezes cause havoc for many borrowers. Even for borrowers being told they can only draw less than the amount initially authorized, it can be a costly inconvenience.

Many lenders are freezing and cutting HELOCs even for borrowers with sterling credit and big equity in their homes, says Weston Sutherland, director of product management, FeeDisclosure.com.

Borrowers generally see HELOCs as an inexpensive, flexible source of cash. Lenders have opened more than $2 trillion in HELOCs, according to broker Keefe, Bruyette & Woods.

But if your line has been lopped, there may be steps you can take to fight back or cope with the problem. "That depends on the equity in your home," said Greg McBride, senior financial analyst, Bankrate.com.

A HELOC is secured by your equity in the home. Recent declines in housing values have trimmed home equity in many areas. That's why lenders are reining in HELOCs. They often reserve that right in the fine print of their deal.

There are three primary reasons that lenders have stopped the HELOCs - one is that lenders do not have funds available if the given HELOCs are used. The second and most common is that the value of properties have dropped, therefor there is no equity, some cases there is now negative equity. The last one, and an offshoot of declining equity is the lenders are requiring a more stringent 80% loan-to-value ratio. For the third case, even if ones house values did not drop the new equity requirements are not there.

Note the first reason is being done for the institution to survive and has little to do with the homeowner. The second and third involve the homeowners and their own illusions (or delusions) about the real worth of the property and their finances. The article points out to home owners that if you are in the second or third category there is little that one can do - these new requirements are being adopted across the industry.

Fighting Back

... You can accept the new limits. Maybe you simply don't need to borrow money.

If an emergency comes up, perhaps you have cash reserves to tap. You might draw down a money market fund now paying around 2%.

... Call the lender's customer service department and ask if it has an appeals procedure. "You generally will need to demonstrate that the value of your home hasn't declined or hasn't fallen by much," said Keith Gumbinger, vice president, HSH Associates, a publisher of loan information based in Pompton Plains, N.J.

You probably will need a current appraisal. Ask your lender for a list of approved appraisers.

Call an appraiser on the list and ask about fees. They often charge a few hundred dollars. But the appraisal may help your frozen HELOC to thaw.

... What if your lender won't let you appeal your frozen HELOC? If you have enough home equity, consider refinancing with another lender.

Funny that the section is called fighting back when the first two options are stating basically do nothing. First - do nothing and accept your situation. Second - find the money someplace. Third - fight the lender with a new appraisal showing more than 20% equity under the current market conditions. Fourth seek out another lender. This order is probably because the majority of people fall in the live in declining areas and/or have less than 20% equity. My instinct is that since we are still in the downward spiral for home prices, lenders will stall and find any excuse for not re-opening HELOCs among people who have less than 30% equity or live in Super Bubble States. With home prices falling in the double digits year-over-year, it is probable that someone who currently has 25% equity will have less than 20% next year.

Bottom line: People who bought homes at the peak of the market may face stiff challenges. Many owners now find the ratio of their home loans plus HELOCs vs. home value has soared. If your home is leveraged over 80%, you likely will find it hard to get more home equity debt.

The situation is better if you bought your house before the market peak. You may have ample home equity. If you have solid credit and reliable income, you can borrow against your house.

This is a good section since it is outlining that if you bought in the peak and/or had 100% financing not to bother. If you bought at the peak - even with 20% chances are you currently do not have 20% equity. That equity is gone. If you put less than 20% down during the bubble, do not even bother. Also noted is that the HELOC bargains during the Great Housing Bubble are not the same, higher fees and even closing costs are the new reality.

Good "wake-up" article for the masses.