When HEL(oc) freezes over

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When HEL(oc) freezes over

Post by Guysanto » Thu Oct 16, 2008 2:12 pm


Many People Having Their Home Equity Lines of Credit (HELOCs) Suspended or Reduced In Wake of Housing Downturn

When the housing market was booming just a few short years ago, many homeowners tapped the equity in their homes by taking out a HELOC (Home Equity Line of Credit). With home values soaring, many people chose to borrow money against the equity in their home, rather than selling their home to realize the gain. The prospect of being able to borrow a substantial sum of money at a low rate was appealing for many people.

For many people, the "easy money" was too appealing, and soon they were relying on their home equity lines of credit in order to finance their lifestyles. How will I pay for my new luxury vehicle? HELOC. How will I pay for my $100,000 wedding and honeymoon? HELOC. How will I pay for the new swimming pool and ultra-expensive sound system for my living room? HELOC.

When the market was booming and home values were shooting up every year, many people took advantage by borrowing more and more money. A home equity line of credit works like this - the more equity that you have in your home (home value minus outstanding mortgage and loans), the more that you can borrow. If your home is worth $400,000 and you have a $200,000 mortgage, then you can borrow say, $150,000. If the home increases in value to $500,000, then your borrowing power increases as well.

The trap that many people fell into is that they assumed that home values would increase every year, thus increasing their available borrowing power. Many people counted on their home equity lines of credit to finance their lifestyles, and were borrowing to the maximum every year. When home values would increase, they would apply for more borrowing power (or be granted it automatically, depending on the lender). Many people were spending more than they were making every month, making up the monthly shortfall with their increasing home equity line of credit.

This is great when the housing market is strong and vibrant - however, when the housing market crashes (as it obviously has as of late), many people find that not only can they not obtain more secured financing on their homes, but they may actually have their HELOCs reduced or suspended altogether.

It makes sense - if the value of your home is increasing, you have more equity in your home and will be able to borrow more against the value of your home, because you have more collateral (in the form of your increased equity). However, if home values drop, then it also makes sense that your borrowing power would decrease as well.

This is what is currently taking place. Morgan Stanley apparently informed thousands of their customers (high net-worth customers, no less) that their HELOCs were being reduced and even suspended. Many banks and lending firms want as little exposure as possible to home-value linked loans. Similar moves have been made at other major firms, including JP Morgan Chase & Co. These firms are taking baths on leveraged loans and are putting the brakes on as fast as possible.

Many people across the United States now find themselves in the unenviable position of being underwater on their homes. Many people bought their homes at the top of the market, so being underwater at this point and time is completely logical and expected. However, there are plenty of homeowners that saw the value of their homes increase over 100%, yet they are still underwater. Why? They borrowed money against the equity in their homes all the way up. When the market peaked, they had little equity as it was, because they had borrowed so much against the value of their homes. When the market started to drop (taking the value of their homes with it), many people found themselves underwater.

Let's say that someone bought a home in Calfornia for $300k back in 2002. They put as little down as possible, and had basically no equity in the home when they bought it. Over the next 3-4 years, the value of the home increased to $600k. This person borrowed a large amount of money against the newfound equity in the home, to finance a home business, expensive additions to their home, an expensive trip or two, a new car, etc. Now the value of their home has fallen to $425k. Still well ahead of their initial purchase price, but due to the fact that they borrowed so heavily against the home, they are now underwater. That is the predicament that faces many Americans today. Their homes are technically higher in value, but they have negative equity in their homes.

This is why many firms are now reducing or suspending the HELOC loans that they have on their books. With home values decreasing, they have much more exposure to risk. This is a trend that will definitely continue, as banks and lending firms are in the damage control, risk minimalization phase right now.

Source: http://davemanuel.com

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Post by Guysanto » Thu Oct 16, 2008 2:15 pm

When a HELOC freezes over
http://money.cnn.com/2008/04/18/real_es ... 2008042104

What to do if the bank tries to put your credit line on ice.
By Carolyn Bigda, Money Magazine writer-reporter

[quote]April 21, 2008

(Money Magazine) -- When Diane Carr, 55, received word in February that her home-equity line of credit would be canceled, she was dumbfounded. The HELOC had been open since 2003, when she bought her Woodside, Calif. home. And Carr had never even tapped it.

"It was just a security thing," she says. No matter. In recent months, tens of thousands of homeowners like Carr have been shut off from their equity as lenders try to stem losses from subprime mortgages and other high-risk loans.

As of September, delinquencies on HELOCs were up 47% year over year, according to Economy.com; the numbers are expected to be worse in 2008. In response, Countrywide has already suspended an estimated 122,000 lines, many in high-foreclosure-rate states, and USAA has frozen or reduced some 15,000 accounts.Bank of America (BAC, Fortune 500), Chase (JPM, Fortune 500) and Citibank (C, Fortune 500), among others, are following suit.

Not all HELOCs will be frozen or downgraded, but you can be sure lenders will scrutinize every account - including yours.
If your HELOC hasn't been frozen (yet)

Know your risk. Areas where housing prices have fallen by 10% or more are prime targets for freezes, says Susan McHan, president of Opes Advisors, a mortgage banking firm in Palo Alto, Calif. Because of new lending standards, your HELOC could also be in danger if you bought your home in the past few years with little money down.

Last year consumers could easily borrow up to 100% of a home's value through a combination of a HELOC and a first mortgage. Today you'd be lucky to get up to 90%; 60% is the max in areas hit hardest by home-price declines.

Lenders are beginning to apply the same standards to existing HELOC customers. Call your bank and ask what the loan-to-value cap is on new HELOCs. If your house debt is above that, your line could be at risk. A change in credit score or a missed payment could also flag your account. Reread your contract to see if such factors allow the lender to cut you off.

Access cash now. If your line is in jeopardy and you need the HELOC to finish a renovation, you could draw a lump sum. On the downside, you'll cut your equity; you'll owe interest now; and if prices keep falling, your loan values could top your home's value. So borrow only as much as you need and put the cash in a high-yielding savings account or CD until the bills in question come due.
If your HELOC is on ice

Fight for a defrost. The letter from your lender should explain why the line was suspended and how to appeal. Some banks use automated processes to identify troubled markets.

To prove that your house hasn't been affected, ask a realtor to pull prices for houses sold within three miles in the past six months, ask your mortgage originator to intervene, or have your house reappraised. The latter can run $400, but if you were counting on the line, it may be worth it.

If a change in your risk profile is the cause, check your credit reports. Carr was told that her HELOC had been canceled because of a drop in her FICO score. But when she checked, it was above 800, so the lender reinstated her line.

Compromise. If your efforts fail, ask for a lower credit line instead of a total freeze. The bank may be more amenable if you hold your primary mortgage there, as that's an insurance policy of sorts.

Shop around. Not all banks have the same standards. If you have at least 10% equity, you may qualify with another lender. Search at www.bankrate.com, or click on the link above and to the right. [/quote]

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