Last week I received a call from an agitated client that I had referred many months before, to a large private bank when he needed a Home Equity Line of Credit - HELOC. He told me he obtained the line with absolutely no problem, but hadn’t accessed it since he hadn’t needed the money until recently. The bank told him that he can’t use the HELOC anymore with the declining property values in his neighborhood. The bank did not want to risk their money on his line of credit. Did I mention my client was mad?
My client is a good client with great credit, makes a decent living, and has kept his finances in check. But, like many people, he’s feeling the pressure of today’s market. He’s looking to retire in the next several years and he and his wife decided to start looking for a home with less upkeep, like a condo or a townhome.
Their reasonable plan was to remodel and sell for a nice profit, since they’d lived there for many years. The money for the remodeling was to come from his HELOC, but the bank had closed his access to the credit line so to remodel he would have to tap into some of his savings. He is reluctant to do so and has decided to wait a little longer to see what is going to happen to the real estate market.
Why Can’t I Access My Home Equity Line of Credit? It Is Frozen!
In areas all over the country, banks are tightening their rules and increasing their requirements on issuing real estate loans. It is becoming more and more difficult for consumers to get a loan in today’s lending environment. Consumers are being affected in every way imaginable by the subprime loan implosion. This includes their previously approved and secured loans and lines of credit.
As in the case with my client I mentioned above, Home Equity Lines of Credit are being lowered, frozen or pulled altogether in many situations. Moreover, the consumer may not receive any notification of this until well after the line has been frozen.
Why Was My Home Equity Line of Credit Frozen?
As I said, banks are tightening the approval process on real estate loans. They don’t want to assume anymore risk than they absolutely need to, especially with the mortgage debacles currently faced by most banks. Case in point, Bank of America is being advised not to bail out Countrywide; nothing is certain at the moment.
While the bank credit crunch may have started as a result of the subprime crisis, the effects are ever-reaching. For instance, banks are being aggressive with their equity positions and exposure and as a result are examining and reassessing values of homes. Most banks have their own in house appraisers assessing values which are in many cases, extremely conservative valuations. These are sometimes 10% - 15% lower than that of an independent appraisal firm. That said, they are attacking Home Equity Lines because these are the easiest to cut any further potential losses. If you’ve been deemed to reside in an area that has been labeled a declining market area your line has or will likely be frozen.
How Do I Know If I Live In a Declining Market Area?
To find out if your home is located in a declining market area, you can do one of two things. First you can contact a realtor and ask about home sale comparisons in your area, which you could compare with your loan size. You could also compare it to the purchase price of the home if you bought within the last 3-5 years. If sales prices are less than your loan amount or sales price, then it is safe to say that you are in a declining neighborhood.
Perhaps an easier way to find out would be to find a mortgage loan specialist or loan officer. Tell them you might be interested in refinancing if the numbers are right, but you’ve heard about declining market areas. They should ask you where you live and other information about your loan. Don’t let them pull your credit just yet; have them check with an appraiser to find out about your neighborhood. If they find out that you are not in a declining neighborhood, then you might consider refinancing with them. Again, this is if you need to and the numbers are right. One reason to refinance is if you have a HELOC and want to pay it off so that you have one payment to make.
Will My HELOC Definitely Be Frozen?
There’s no way to know for sure whether your HELOC will be frozen, no matter whether or not you live in a declining market area. Each bank has different standards and protocols by which they do business. While these protocols are certainly changing, there has not been any public or blanket policy issued specifically regarding Home Equity Lines of Credit.
If you are concerned about it, and you have plans for your HELOC you can either take the money out now and let it sit in a CD or other safe place, or you can call your bank and ask them what’s the scoop. Good luck.
