What to Do if Bank Cuts Home Equity Lines of Credit Limits

Knowing 5 things will help homeowners' HELOC decisions, Bills.com president says

SAN MATEO, Calif., Nov. 5, 2008 – The economic downturn is affecting not only Americans' home values, but their home equity lines of credit, said Ethan Ewing, president of free online consumer portal Bills.com.  

"A few years ago, Americans who owned homes were encouraged to use homes as piggy banks," Ewing said. "The thinking was that, in a crunch, you could simply draw upon your home equity line of credit (HELOC) instead of an emergency fund you had built up. Then, of course, home values plummeted, and with the latest stock-market gyrations and credit crunch, many HELOCs now are being restricted – and many homeowners are being taken by surprise.” 

These new restrictions stem from home buyers who began to fall behind on payments on their adjustable-rate mortgages (ARMs). This summer, RealtyTrac reported that foreclosure activity increased by 14 percent in the second quarter of 2008 over the first quarter, posting a 121 percent increase over the same quarter in 2007.(1)  Amid those losses, the bottom fell out of the financial market -- at least for banks that had big investments in shaky mortgage loans.  

As a result, Ewing said, banks now are being very cautious about how much and to whom they lend on home equity -- especially given that HELOC delinquencies increased 40 percent in 2007 and are anticipated to go higher this year.(2)  He provided homeowners with HELOCs five tips for navigating this new environment: 

Know what determines the credit limit. A few years ago, the limit on consumer borrowing was 100 percent or even 105 percent of the value of the home. Often, those values were inflated by rapid price appreciation -- the housing "bubble" that now has burst. Now, most buyers are limited to borrowing no more than 90 percent of the value of their homes – and in many cases even less.

Know if the HELOC limit can change. Homeowners with an existing loan should check original loan paperwork to find out if their bank can reduce the credit limit after it has established that limit. Some loan limits are being cut, even if the borrower has a perfect credit history and has not used any of the formerly established credit line.  

Know what puts a HELOC at risk. Several factors could cause a lender to reduce or eliminate a HELOC:

1. Late payments or missed payments break the contractual agreement.

2.  Falling home prices in the area could cause the lender to reduce amounts of credit available.

3. General market uncertainty encourages banks to hold onto their cash.

Know the options. For homeowners who will be hindered by a reduced or eliminated HELOC, several options remain.

1. If you are in the middle of a project -- say, remodeling your kitchen -- and were planning to rely on the HELOC for funding, consider withdrawing funds now -- IF you can pay back the loan.

2. If you were planning to rely upon a HELOC for an emergency fund, use current events as motivation to establish a cash emergency fund. Remember, even a few hundred dollars can make a big difference when it comes to weathering car repairs, home repairs or a medical emergency.

3. If you hoped your HELOC could pay for retirement or other extended expense, take another look at your choices -- up to and including taking a reverse mortgage, purchasing long-term care insurance coverage or selling your home to reduce your expenses.  

Know it is possible to appeal. Homeowners who believe a reduction in their HELOC is unwarranted can appeal to their bank. Know, however, that loan officers will expect nearly perfect credit and proof that the home has retained its value (such as letters from real estate agents estimating its potential sales price).  

"HELOC cutbacks are frustrating, but they are part of the medicine needed to return ailing financial markets to health," Ewing said.  

About Bills.com (www.bills.com)

Based in San Mateo, Calif., Bills.com is a free one-stop portal where consumers can educate themselves about complex personal finance issues and comparison shop for products and services including credit cards, debt relief assistance, insurance, mortgages and other loans. As the online portal to Freedom Financial Network, LLC, the company has served more than 40,000 customers nationwide since 2002 while managing more than $1 billion in consumer debt. Its RSS feed is available at http://www.bills.com/news_releases/

Bills.com holds the No. 257 spot on the Inc. 500 list for 2008, and the No. 3 spot on Entrepreneur Magazine’s Hot 100 list of the fastest-growing U.S. companies. Bills.com also was named a finalist as “most innovative company” in the American Business Awards in 2008. Company co-founders and co-CEOs Andrew Housser and Brad Stroh were named to the Silicon Valley/San Jose Business Journal's "40 Under 40" list in 2008, and are recipients of the Northern California Ernst & Young 2008 Entrepreneur of the Year Award.

(1) http://www.realtytrac.com/ContentManagement/pressrelease.aspx?ChannelID=9&ItemID=4891&accnt=64847

(1) http://blogs.wsj.com/developments/2008/04/21/what-if-the-bank-freezes-your-home-equity-line-of-credit/