Home Equity Lines of Credit have grown quite popular and are starting to become the norm for second mortgages nowadays. However, with home values still dropping in California, HELOCs have been consistently feeling the pressure. But a recent six-page letter from the Fed has now put lenders guilty of freezing HELOCs back in the hot seat.
Why the Cold Shoulder
Since HELOCs are issued as a line of credit instead of a typical loan, lenders reserve the ability to cut off this line and essentially freeze the loan. Due to a combination of bad loans and slipping home values, lenders such as WaMu and BofA have been freezing a sizeable amount of HELOCs lately. From a lenders perspective, this reduces the risk of such loans from defaulting because of dropping home values.
For those who pay their bills on time and are considered “credible borrowers”, this can be incredibly frustrating as it seems you were promised a loan and now it is being taken away. More importantly, this freeze can actually cause a serious financial hardship - home repairs, medical bills, and other needs are all put on hold as this source of cash is now taken away.
So what do we do? Well in California fashion, we complain- and now the Fed has responded.
The Warning to Lenders
Here is a quick highlight of the six-page letter issued by the Office of Thrift Supervision
- Lenders can’t generalize the freeze of HELOCs for “broad geographic areas”
- They must evaluate each loan individually, instead of making blanket assumptions
- A freeze below the outstanding limit cannot result in a higher payment for the borrower
- If the condition that resulted with a freeze is fixed, lenders can’t charge a fee to restore the credit line
What This Means for You
While it is OK to freeze a HELOC, lenders will now have to pay more attention when they do freeze a line of credit. Whether they will from now on is another story. But here are a few things you should keep in mind:
- “An ounce of prevention is worth a pound of cure.” As lenders find ways to reduce their risk in existing HELOCs, you can expect standards and guidelines to make it tougher to obtain new HELOCs.
- Lenders aren’t just doing this for themselves. In a way, some of these freezes are truly warranted. With a loan based on values during the “bubble years”, it is easy for a homeowner to dig themselves into negative equity territory.
- A HELOC is a line of credit and should be considered “potential” money. If you don’t want to deal with the risk of losing this credit line, explore the options of a traditional second mortgage.
- Lastly, but most important - in this economy, think conservatively. A frozen line of credit can be tough, but an upside down mortgage can be devastating.
What do you have to say? Leave a comment, I’d like to hear what you’re thinking and others might too.
1) Have you experienced a frozen HELOC?
2) Do you know others who have?
(17 votes, average: 4.88 out of 5)
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It’s about time somebody did something! My brother had a HELOC that the bank put a freeze on. They were using the money to pay for some medical treatment for his wife and now that that money is gone, they are going into debt. It doesn’t seem fair as they make their loan payments regularly… Hopefully this help. Great post!
We have a HELOC, but it hasn’t gone into a freeze. Let’s just hope this ensures that doesn’t happen.
Joe that is really sad. When I look at our situation it seems minimal compared to this. We took out the HELOC to fix up our house and add a room for the new baby. I hope things get better for your brother and his wife.
–Janice
“Lenders can’t generalize the freeze of HELOCs for ‘broad geographic areas’”
So basically before this, the bank could freeze any one’s HELOC in a specific area if the values are dropping, no matter what the individual situation?
That just doesn’t seem right and it’s a horrifying reality for all of us living in California. Everyone knows the values are dropping here.
I had a HELOC that was frozen in February of 2008. I was using this HELOC to fix a property that I bought last year and was DEAD IN THE MIDDLE OF the project. I had just finished demolition of pretty much the whole houe and started new construction. They froze the HELOC at the worst time possible. Because of this, I have had to suck all my savings to keep the project going so that could finish it. But it dragged out the project till now, where Im still not finished. This is when I have already drained my entire 401K, Savings, sold all my stocks and borrowed about $30k from my family! I missed payments on my primary residence and this house both last month!
If I knew that thy would freeze the HELOC, I would have NEVER started the project and instead just rented that house as it was, and its rent would have come close to covering the payments!
Craig: Well, at the time of the freezes, it seemed as if lenders were doing so on quite a broad generalization. It seemed as if the on-time credible consumers were getting sucked into the mix simply because they were in an area deemed a “declining market”.
As you have read, and from the stories I have heard - its the counterproductive effect that these Freezes have had that really irritate. The whole point of freezing a HELOC is to avoid further risk, but those in medical debt trouble or in the middle of home repairs stand to suffer severely. As a result, they are stuck in this financial bind ONLY because they have had their HELOCs frozen.
I understand the point in freezing HELOCs because of declining equity - what I don’t understand is when you end up putting consumers at risk BECAUSE of this freeze.
Ali: Thanks for sharing with us Ali. This is a severe example of the kind of trouble these HELOC freezes have caused. There has to be a better way of limiting the lender’s risk, and unfortunately freezing a HELOC so freely can often lead to consequences like yours.
Ali, I frequent a website http://www.consumerist.com - they are an internet website where consumers fight back. Their tag line and motto is “Shoppers Bite Back”. I know during the initial freezes in the beginning of 2008, many people submitted their stories to them. I suggest you let them know your situation and what you have gone through. Occasionally, they produce tremendous results because of their online following and community of consumers who have had similar experiences.
Ali, I know your troubles aren’t over yet - so I really hope you the best of luck. It’s an unfortunate situation, but there are countless people who have since suffered in a similar fashion. Again, thanks for sharing your personal story with us.