HELOC suspensions painful, spreading

I have 2 Helocs on two properties totalling $500,000. Over the years, I have used these lines of credit and paid them back numerous times. I have perfect credit, and lots of money in the bank. My home has certainly lost value since it's height, but my Helocs were not taken out at it's peak value. Needless to say, I knew that freezing the credit lines was going to be an issue. I think it has more to do with the fact that the lending institututions simply are not liquid enough to fund them if there was a run on demand right now. So, I decided a year ago to max out my lines, even though it doesn't make any financial sense to do so. I pay a higher rate of interest than I earn on that money. I guess you could say that it buys me peace of mind in this uncertain time. We are all paying for the mistakes that the greedy wall street traders and securitizes divised...

I do feel sorry for the couple trying to adopt, but for everyone else...

Good grief, what's with all the whining? It's not your money people. If banks no longer want to lend you as much of their own money, that's their prerogative. You sound like addicted junkies - "no, you can't take my debt away from me!" If you want something, try this for a change: save.

This is the most wrongheaded post I've ever seen on this blog.

It is irrelevant that people have "good credit" or "never missed a payment." And you don't need to read the agreement "more carefully." Just look at the freaking name. What part of home equity line of credit do people not understand?

This is a secured loan, and the collateral--homeowner equity--has gone away, or is at least headed for the exits as housing prices continue to decline.

And this:

"Funny thing," Sanchez wrote, "they will send me a credit card with a line of $20K which we all know is unsecured, but they wont free up the same amount on a secured line."

Really, Mr. Sanchez? You're getting offers for credit cards at the same rate you were paying on your HELOC? Why, I'd sign up for those offers right now!

I don't see how the public is served by endless opportunities to whine about the unchangeable facts of life. They might benefit more from a journalist telling homeowners what everybody involved in the financial markets already knows, thanks to handy Fed statistics: The banks don't have any money to lend anyway. Investors are in hiding, and for the first time in history, non-borrowed regulatory capital reserves have fallen below zero. The global banking system is on the threshold of collapse.

I am terribly, terribly sorry for all the people whose punch bowl was suddenly taken away. That is, I'm sorry it wasn't taken away sooner, because then we wouldn't be in this mess.

I agree. Stop the whining. If you can't afford to pay for something in cash, then don't do it. (The only exception I would make to that statement is a student loan, since an education pays you back for life.) I own a home and have never, ever borrowed against it. In 3 years, we have put on a new roof, new windows, new exteriors doors and renovated a bathroom using the old-fashioned way: budget, save for it, and then spend -- in that order!

Bravo, Anon. Bravo.

"If you can't afford to pay for something in cash, then don't do it."

Did you pay for that house in cash?
Paid for your car in cash?
Guess you've never used a credit card before?

Oh my god! I cannot tap into my HELOC. Now I cannot show off my new plasma to my friends...wah wah wah...

Wow. There's a lot of bitterness on this board.
But pause, if you would, to consider the following. We're not talking about people applying for HELOCs, but for people who already have them. In order to obtain them, they paid a fee, and the bank performed an appraisal.

When the bank freezes or cancels the HELOC, it doesn't have to refund the fee. Even more outrageously, the bank doesn't have to perform a new appraisal. It can just arbitrarily decide that the home is probably worth less, that the equity has declined, and so that it doesn't want to honor the terms of its contract. And when it makes that decision, it doesn't have to provide either the estimate of the home's current value it used to make the decision, or how it was determined.

Even responsible borrowers can get hurt by these policies. If a homeowner prudently taps just half of their HELOC, for example, and then has the size of the HELOC reduced by 50%, they will appear to credit rating agencies to have tapped the entire line - and that will adversely impact their credit scores. That's the sort of thing that can lead to a downward spiral, as lower scores drive up other variable rate loans.

That's not how this was supposed to work. And I suspect that, years down the road, lawsuits will force the disclosure of damning internal memoranda and the disgorgement of ill-gotten profits, but that won't help borrowers whose lives were hurt in the interim. If, as appears fairly clear, banks are simply applying crude pricing models in a blanket fashion to avoid honoring the commitments they earlier made (and the expense of sorting good commitments from bad), they're going to get hit for it eventually in the courts and by regulators. But if it enables them to conserve their capital and stem their losses long enough to pass through the credit crunch, they probably won't care about later fines. Which doesn't mean that we shouldn't.

Wow. There's a lot of bitterness on this board.

Well, if we're going to venture into armchair psychologizing, I think a better descriptor is "enraged entitlement." The cries of "it's not fair" eerily echo the complaints of a spoiled child whose parents finally discover discipline.

We're not talking about people applying for HELOCs, but for people who already have them.

To repeat myself: What part of home equity line of credit do you not understand? The security for these loans has evaporated, or is shortly destined to evaporate in the near future.

Would you have banks lend unsecured dollars at secured rates? In a time of near-collapse of lending institutions, you think this is a prudent course? In an era of record foreclosures and rumors of "walkaways," you think it's helpful to let people borrow more against their house than it was worth? Banks are finally behaving responsibly. It's time borrowers did the same.

When the bank freezes or cancels the HELOC, it doesn't have to refund the fee

Why would it? Was a title search not performed? An appraisal not done?

Borrowers received precisely the services they contracted for. I know you very much want HELOCs to promise unsecured loans at low rates until the end of time. They don't. They never did. Read your agreement.

banks are simply applying crude pricing models in a blanket fashion

Um, this is how all these borrowers qualified to tap HELOC ATM in the first place. I can't imagine a group less qualified to complain of the practice.

I suspect government will rush in noisily to guarantee the "right" to borrow yourself underwater, precisely to meet criticisms such as yours. Our best hope is that such programs will be as ineffective as all of the housing crash programs to date. Otherwise, your future posts will be demanding federal bailouts of all the homeowners who borrowed more on their HELOCs than their houses were worth.

As painful as these stories are, the banks are doing the right thing. Allowing people to spend away their non-existent equity is not doing them any favors. People have spent themselves to the poor house by housing their homes as a ATM. Given the credit problem we have today in our country, people have to adjust and reconsider their standard of living. Wake up people, HELOCs were never meant to be used for adoptions, vacations, etc. Your home is your home, not your atm card.

My husband and I received a letter from our lender, Washington Mutual, saying the value of our home had declined and the total amount of our HELOC was going to be reduced. Oddly enough, we had paid it down to just about $2k less than their new maximum amount, so we weren't in any hot water.

But I was suprised at the notion that our home's value had declined to such an extent sure, we're all experiencing decline, but to me, this seemed extreme. I have my finger on the pulse of the market, and was expecting a decline in the neighborhood of 5%, not 25%. So I called WaMu.

In the letter I had been sent, WaMu claimed they had performed a more recent appraisal, and I wanted to request a copy of that appraisal. I knew noone had seen inside my home since I had purchased it, so I was surprised to hear a new appraisal had been conducted.

Turns out, no such appraisal had been performed. Instead, WaMu used data related to recent sales in my town to re-assess my property's value, with apparently no regard to whether those properties were on a street as desirable as mine, or in a condition like mine.

I was offered the opportunity to pay out of my own pocket to have an appraisal specific to my home conducted in order to re-adjust my HELOC, but decided to skip this step for now. My husband and I don't need the money, and are in the process of paying off the entire HELOC alltogether. Further, I found it inappropriate to have to pay my own dollars to correct a situation that my bank has caused.

Has anyone else found themselves in a similar position?

Countrywide froze my line of credit two weeks ago. Like mrs_in_mass, they did not reappraise my property. They further refused to provide any support for the number they came up with, saying only that prices have declined in "my area". I live in Boston, I wonder if they include the entire city as part of "my area."

My options are to put together a list of comparables, obtain a broker's opinion, or have an appraisal done at my cost. I plan to do one or both of the first two options. I don't intend to draw on the line, and I never have. But I don't want this nonsense to affect my credit score.

Incidentally to all of the posters here who seem to blame the borrower, I paid for all of my renovations with cash, I've never paid a bill late, and I've got plenty of savings. It seems to me that lenders have gotten themselves into a bad situation, and now they want me to cover for their mistakes, not the other way around.

This blog would be more fun if there wasn't the constant criticism of people and if people would discuss the issue, not motives, etc.

Very de-constructive.

For example, rading about individuals' experiences with HELOCs is interesting and relevant.

Reading over and over again about how "you did this wrong" and "you can't expect that", etc., gets tiring, fast. I suggest writing your own blog, if you want to pull that kind of junk. Oh, right, no one would read it.

This blog would be more fun if there wasn't the constant criticism of people

I suggest writing your own blog, if you want to pull that kind of junk. Oh, right, no one would read it.

Interesting.

"Reading over and over again about how "you did this wrong" and "you can't expect that", etc., gets tiring, fast"

How true, thank god for the candyland condo and real estate blog. Where one can still find hard hitting pieces on valets and trash collection....

Thank you.

I rest my case!

This is kind of like when the bartender cuts off a very drunk person.

I don't care what the money is used for, if your are depending on purpetual loans to go on with your life you have a problem.

"Did you pay for that house in cash?
Paid for your car in cash?
Guess you've never used a credit card before? "

People think no one can survive if they aren't living in every way on borrowed money.

Some people actually don't need to ask the bank or anyone else to for money! They just use their own. I know it is a strange and foreign concept and I am trying to go slow here for those who have never heard of it but you too can have a piece of the pie if you stop spending money you don't have on stuff you cannot afford. You might even be able to (gasp) have real equity in your home one day so if you do sell there is something for you to actually walk away with.

I house is a liability not a cash cow.

This "credit crunch" is an excellent exaple of why homeowners should be working with a Certified Mortgage Planning Specialist. The traditional loan officer would say to keep the line open for emergency purposes without taking into consideration market fundamentals and the borrowers short and long term goals. As a CMPS I would examine the strategy of drawing down the entire line and have it in a side account compounding interest while maimizing tax deductions! The differece in arbitrage would typically eceed the monthly cost of the mortgage payment, create liquidity for the home owner and use the home for wealth creation purposes. To make this type of advanced mortgage planning prudent, it should only be excercised with a suitable borrower and in coordination with a reputable financial planner.

Binyamin - In the spirit of your request that we "play nice" in the comments of your blog, could you please request the same of John K? I find his comments somewhat rude and unhelpful.

[Ed. Note: Absolutely. I'm requesting the same of everyone. Savage ideas. Respect people.]

I have a home equity line of credit that I use to pay for my son's education. I have had this line of credit for many years (predating the current housing situation). This appeals to me because the interest is tax deductable, and educational loans are not tax deductable. I also only need to pay the interest, at this point in time. I am not using the money for vacations, tvs, or luxury items. It would hurt me financially if I lost this line of credit. Since my HELOC and mortgage represent about 75% of values for homes in my neighborhood, I am nervous about the possibility of receiving such a letter in the future.

I think more than anything, that what bothers me about the HELOC current situation is the possible arbitrariness of home value determinations and concern that this is not being applied evenly to all borrowers. Unfortunately, it is difficult for an individual borrower to obtain information because the banks are not tranparent in their application of rules. It is not possible for us to know whether they are targetting particular personal profiles, neighborhoods or communities fairly or legally.

Aside: I also feel that while some of the above blog remarks may be correct, many appear to be mean spirited.

I think the housing price data that came out today somewhat vindicates the bank decisions on revaluing homes. Folks, your homes are dropping in value, for many different reasons including economic (weak economy), demographic (people both young and old preferring city condos to suburban single family homes), and market related (no more easy credit).

In the 1989-1992 correction, median home prices in my childhood city, Somerville, dropped over 34% according to www.thewarrengroup.com. And that was simply a regular correction (overbuilding after a good economic streak - typical real estate correction). now we have to correct for foolish lending too - this correction will be bigger than the last...

Most home equity lines of credit also have a fee recapture if you pay them off early. Shouldn't the local megabank waive this fee if they won't let you use the line of credit and you choose to open a new one up with a different lender?

There are some judgemental comments here. As the mortgage planner said above ,a heloc can be useful as a planning tool to "some"borrowers. My heloc was frozen and, yes, I'm whining because I paid thousands of $ in fees to get it and now can't use it--even though I don't need it rigtht now. I would have even been okay if they had just reduced the cap, but that was not offered. To those who pay for everything with cash, I say good on you. For those who have used debt prudently, I also say good on you. I'm truly thankful that the G.I. Bill enabled us to buy our first home. I agree that some folks get into trouble with credit, but that doesn't mean everyone does.

I have a home-equity line through Bank of America, and on Saturday, I received a note informing me that my total limit had been automatically reduced by over $50,000 to less than $75k, the result of "declining area property values." Best of all, I found that the reduction had already taken place---over a week earlier.

The customer-service rep I subsequently spoke with (or screamed at) informed me that the valuation had been reset to $266,000, based on a "national market analysis." Some quick research (and my own knowledge) revealed that BoA's figure was in fact well below the estimated market value for the property, which showed a median of about $378k, and as high as $420k, based on a number of available sources. (A neighboring home with similar square footage/features went on the market just last week for $389k.) In short, while many markets have corrected severely of late, ours has managed to hold its ground, comparatively speaking.

Our first mortgage balance stands at around $140k. Given the bank's home equity loan-value ratio of 85%, we were obviously well within the comfort zone for the existing $125k line, even using the lowest end of the market-value range (or even BoA's bargain-basement figure).

What is most interesting is the manner in which this action was carried out. Despite the fact that we've been good customers for years, BoA saw fit to reduce the line without any prior warning on May 15, then took another 10 days to inform us by mail---on Saturday of Memorial Day weekend, no less--that our previously comfortable $50,000 cushion had been turned into a mere $450 crumb. As I use a portion of this line for business-related cash flow, this left me little room to make arrangements with payers until the situation is resolved.

This isn't just inexcusable, it's customer relations at its worst.

The good news: Rather than wait for BoA to re-consider, I immediately rang up a rep at the local TDBanknorth branch (who seemed stunned by BoA's figures), and I should have a new HELOC in fairly short order. I'm also selling a 1st mortgage I hold through BoA, dumping my checking account, and leaving a three-day-old tuna sandwich in one of their ATMs.

--Dave

OK - I've seen some pretty harsh, undue remarks.
Home equity is equity in your home. The line is secured. By now, most people realize that this is not tied to loan to value or anything other than the fact that property values are declining. I got a letter from my HELOC lender, National City. They dated the letter 7 days before I got it, said the line would be suspended in 3 days. They were willing to pay only 1 outstanding charge.
Part of the problem is that they are cutting off (suspending) the line, THEN notifying you. If you have projects in progress, you have to see if they will pay for the charges. It's a very ugly position to be in - especially when you are working with contractors and believe you can pay them - only to find out that the money disappeared! If they will pay 1 charge and you have 3 already in the process of being submitted, somebody's not getting paid. And the collection activity hits who when you can't pay the bill.
There is nothing unreasonable about going through the process of applying for the line of credit, paying for an appraisal, and using it as agreed. Sorry, whining does not decribe getting the run snatched from under your feet.

I didn't know that my HELOC had been suspended. I've never missed a payment and paid WAMU thousands of dollars in interest, religiously for several years.
I wrote a check for $350 three weeks ago. Today, I got it back, the day before my family is leaving for our only vacation. So instead of having $196 for gas. We have a negative $153 balance. I called WAMU about it, and they said that my account was suspended because my credit score has declined over the past few years. Yeah, over the past few years I've had three children too.
The sad thing is that everytime I call the "customer service" the person at the other end barely speaks english and I can't understand them and we never even get to the problem before I blow up and hang up.

I have a HELOC of $70K and I used it completely and there is now total loan balance of $69K and I am paying it interest only. Now I received the mail saying my HELOC a/c has been suspended. Does it mean, I don't need to pay this amount?

We had a HELOC of $28,000 and took out $23,000 in 2004 for to do a home improvement. We put 20% down on our house, are never late, make an extra payment to principle every month. GMAC Mortgage suspended the remaining cash in the HELOC this week. They used some AMV formula to tell us our house had dropped in value. Of course they never came out to see what the $23,000 did to the inside of our house remodeling the entire kitchen and both bathrooms in granite. They never came out and saw the $40,000 pool put in (which is worth increased value in Vegas) that we paid for on our own. THEY should be the ones required to do a new appraisal like had to be done to get the line in the first place and not do some AMV without seeing our house.

I do not mind GMAC suspending the rest of our credit line. We only used it for one house improvement in 2004 and it is not that big anyway. What I mind is that they did an appraisal to issue the line but they are requiring me to do the one to take off the suspension. They should have to do an appraisal to suspend the line rather than requiring that I pay $400 to have an appraisal done. That way they can see the $73,000 in improvements in the home that I paid for in cash and not with the HELOC.

I also had an Heloc from National City in the amount of $28,000. I have never used it at all but continued to pay the $50.00 annual fee to keep the line open in case of an emergency. I know home prices have fallen but their automated valuation method has listed my home for 96,457. Funny thing is I bought my home 13 years ago for 165,000 have my home assessed for 194,000 (thought I was lucky as it assessed lower than my neighbors homes) and have an insurance replacement cost of 330,00- the insurance companys estimate not mine. I am mad as they will not reimburse me the 300 I have paid to keep this account open.