More HELOC customers are now delinquent on their loans than have been since 1997.

MarketWatch reports:

“Delinquency rates for home equity lines of credit and bank cards rose during the first quarter, the American Bankers Association reported Wednesday, citing ongoing housing market stress and general economic weakness.”

HELOC delinquencies have reached 1.1% - meaning that over one in every hundred borrowers has an account over 30 days past due.

No wonder banks are tightening requirements on home equity loans.

See Also:

Banks Record Unprecedented HELOC Losses

HELOC Lenders More Unpredictable Than Ever

Finally, some good news for HELOC borrowers. Recently, the FDIC recently sent a letter warning lenders to follow proper procedure when freezing home equity lines of credit.

Here are a few of the most notable points:

- According to regulation, HELOC lenders may only reduce a borrower’s line of credit under certain circumstances.

- Lenders are permitted to reduce a credit line should the borrower’s home “decline significantly below the dwelling’s appraised value for purposes of the plan.”

- The Federal Reserve says a “significant decline” may be a drop of 50% or more in the home’s equity. However, this number may vary depending on individual circumstances.

- Lenders don’t need to do full individual appraisals to freeze a line. However, they must have a factual basis for believing that a property’s value has declined.

- Lenders may also suspend HELOCs if they believe that the borrower will not be able to pay back the loan due to a change in financial circumstances. This belief must be founded on a factual basis (i.e. a loss of income and late payments).

- Borrowers must be notified of HELOC freezes within three business days. The lender must specify whether borrowers need to request reinstatement of their lines. If they do not specify this, the lender must monitor the account and reinstate the line as soon as circumstances permit.

The definition of “significant decline” is of major interest. Many borrowers have had their HELOCs frozen due to a home value decline of much less than 50%. Unfortunately, the 50% example given by the Federal Reserve seems to be more of a guideline than a hard and fast rule.

Regardless, the above information can be extremely useful to borrowers facing line freezes. If your lender has frozen your line without following proper procedures, you may want to request a reconsideration.

See Also:

Which Borrowers are Freezing HELOC Lines?

A new loan product called a “shared equity agreement” allows borrowers to take out money and pay nothing back until they sell their property. Sound too good to be true? That’s because it is.

Here’s the catch: the borrower must agree to pay back the money borrowed plus half of the home’s appreciation value between the time they entered into the agreement and the date of sale.

A Reuters article explains:

“Under the Rex Agreement, a homeowner with a $500,000 house can get $71,429 now in exchange for a 50/50 split on the home’s appreciation (or depreciation) going forward. Over the last 20 years, single-family home prices have gone up 6.5 percent a year, according to industry data compiled by data360.org. If the home appreciates 6.5 percent a year for 10 years, that means that in 2018, the home would be worth $938,568. The homeowner would owe Rex $71,429 plus $219,284, half of the appreciation, for a total of $290,713. If, instead, the homeowner borrowed $71,429 at 10 percent interest — higher than the current going rate for second mortgages for good credit risks — he would end up paying $41,844 in interest, for a grand total of $113,273.

Why the huge disparity? Part of it is because these figures don’t account for the time value of money; that the homeowner would be paying off that loan over 10 years and not at the end of 10 years. But most of it is because the shared appreciation agreement effectively leverages the issuer’s money: They’re giving the homeowner roughly 14 percent of the home’s value and getting appreciation on 50 percent of its value. In effect, though the deal isn’t structured as a loan, they are “lending” $71,429 but getting an expected 6.5 percent interest on $250,000.”

When you put it that way, it doesn’t seem like such a great deal.

On the flip side, many of these shared equity agreements benefit the borrower if his home equity declines at the time of sale. Should the property decline in value, the lender will pay for half of the loss. That’s a feature many HELOC borrower probably wish they had at this point.

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Is a HELOC Right for You?

Recently, there’s been a lot of talk about the lack of equity in American homeownership. While home equity loans such as HELOCs allowed people to pay for college and afford property improvements, they were also a drain on the economy.

Hot Property reports:

“…in at least 63 years, the amount of equity we have in our homes has fallen below 50%…

What’s particularly startling about that number is that even though the total value of America’s homes doubled since 1998 to more than $20 trillion dollars, the total mortgage debt grew even faster.”

Unfortunately, the lack of equity has led to the current crisis. Many of the people facing foreclosure could afford their homes if they had not taken out home equity loans. Maxing out HELOCs made many upside-down on their loans when property values began to decline.

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HELOC Freeze Help

Taking out a home equity line of credit (HELOC) is now quite difficult. Those who planned to tap their equity are considering other borrowing options, such as credit cards.

A recent Associated Press article explains:

“Net home equity extraction fell nearly 60 percent from a year earlier to $205 billion in the first quarter, according to Merrill Lynch. The investment bank also notes that some $1.2 trillion in equity and housing wealth was wiped out in the first quarter alone because of plunging home values.

At the same time, revolving credit usage — which includes credit cards — accelerated sharply to a year-over-year growth rate of about 8 percent in recent months. That’s the fastest rate in seven years and well ahead of the 2 to 3 percent rate of growth from 2004 through 2006 when home equity lines of credit were a bigger source of cash for consumers, according to Merrill.”

Unfortunately, credit card companies are wary of desperate customers racking up bills during this economic downturn. Many are tightening their own standards and are limiting the credit they will give customers. When a customer with a credit balance has his limit reduced, his credit score almost always decreases. This can make it more difficult to apply for another card or take out a home equity line of credit.

While credit card companies have become more strict than in recent years, borrowers with good credit can still take out a line with relatively little hassle.

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How a HELOC Works

Most home equity lenders claim to have some sort of appeal process for borrowers facing line reductions.

According to a Wall Street Journal article, Bank of America is willing to reconsider their HELOC freeze decisions. If the borrower can prove that their property has not lost as much equity as believed, the lender may be able to restore their limit.

“Banks including Bank of America and Washington Mutual say there’s a process in place for customers to appeal these decisions. Washington Mutual spokeswoman Sara Gaugl notes that its clients who have had lines decreased often still have access to available credit.

“If the homeowner feels their situation is different, we will listen to them, particularly if they have an independent appraisal that shows their home has been spared from neighboring drops in home value,” says Bank of America spokesman David Bradley.”

Unless the lender’s property really has retained its value, there is little chance of getting a reversal. However, if your HELOC line has been frozen, it’s always worth asking.

See Also:

Lenders Freezing HELOC Lines

What to Do if You’re Hit by the HELOC Freeze