Only withdraw money from your HELOC if you’re sure that you can pay it back. Home equity borrowing is much more risky than credit card borrowing because it puts your property on the line.

See Also:

5 Financially Sound Ways to Use Your HELOC

Washington Post reporter Elizabeth Razzi explains:

“My inbox is overstuffed with comments and suggestions from readers…

In response to last week’s column about the availability of credit, Greg Schuckman of Lorton said banks are continuing to pull back on existing home-equity lines of credit. “I got a letter from Wachovia earlier this week letting me know that my $239,000 HELOC had been ’suspended’ because of falling home values,” Schuckman wrote. “Even though I have perfect credit and have about $250,000 in equity in my home, according to their calculations, falling home prices in my area have caused the value of my home to drop by about $150,000 from a high of $745,000 two-and-a-half years ago. I have applied for a new, $150,000 line of credit with a different lender, so we’ll see how that goes.”

If you live in an area with declining home values, keep an eye out for a HELOC freeze letter.  If you do receive one, there are a few actions you can take to have the decision re-evaluated.

Naples Daily News reports:

“The Small Business Administration (SBA) is alive and well. However, participating banks are returning to the basic tried and proven underwriting standards of an earlier generation. Startup businesses will find it quite difficult to secure any type of financial assistance unless they can demonstrate a clearly defined business plan and are prepared to invest up to 25 percent of their own money in the venture. These sums must not be tied to other forms of credit, such as a home equity loan, unless the HELOC can be repaid from sources other than the earnings of the business.”

Only take out a home equity line of credit if you anticipate a need for the money. If you don’t have a plan, you may want to save your equity for unexpected needs.

See Also:

Is a HELOC Right for You?

Where to Put Your Home Equity Funds

MarketWatch reports:

“Fannie and Freddie will not foreclose on occupied homes from Nov. 26 to Jan. 9. Fannie said it will reach out to 10,000 affected borrowers and Freddie will reach out to 6,000 affected borrowers.”

For more information about the foreclosure process see: HELOC Foreclosures.

Dark Reading reports:

“Federal agencies said Monday they have arrested three members of an identity theft ring that has stolen more than $2.5 million by fraudulently accessing home equity lines of credit…

HELOCs are an attractive target for criminals, because many individuals sign up for such lines of credit as a hedge against emergencies and don’t ever use them, Liebermann observes. Many HELOCs involve large amounts of credit, because banks and financial insititutions generally offer lower rates on higher amounts of credit, he notes. If a customer has not used a HELOC, most banks do not send out a statement. And if a criminal can successfully break into an account and change the address to which statements are sent, that customer could go for many months without being aware that any activity is taking place.”

Yet another reminder to constantly monitor your home equity account and check your credit regularly, even if you don’t have a HELOC.

See Also:

Home Equity Line Thieves

New Program Detects HELOC Application Fraud

Home Equity Lines Targeted

Forbes.com reports:

“Mortgage equity withdrawal (MEW) is collapsing from the $700 billion annualized in 2005 to less than $20 billion in the second quarter of this year. Thus, with falling housing wealth and collapsing MEW, U.S. households cannot use their homes anymore as ATM machines.”

Many borrowers are continuing to experience home equity shrinkage while lenders continue monitoring for potential HELOC freezes.

See Also: 

Don’t Rely on a Home Equity Line to Save You From the Crisis

Are Lenders Freezing Home Equity Lines Illegally?

One such diet is the home equity line of credit plan. They explain:

“It’s like the Atkins high-protein diet: You can pay off your debt more quickly with a much lower interest rate by using a home-equity line of credit — and get a tax deduction in the process. But cheating by using the credit line to borrow more will ruin your hard work. And you have to have the right stuff for it, including adequate equity in your home and a good credit record, to qualify for the current rate, about 5%, according to Bankrate.com.”

Consolidating high interest debt (such as credit cards) with a home equity line of credit can save some borrowers thousands and help them pay off their obligations earlier. It’s true, however, that there are some risks. People who already have trouble managing credit card debt may find themselves struggling to control spending when they have access to a massive home equity line of credit. Additionally, HELOC borrowers risk their homes if they cannot pay back the money owed.

See Also:

Why Pay Off Credit Cards with a HELOC?

Will Paying Off Credit Card with a HELOC Improve My Credit Score?

Using Your Home Equity Line of Credit to Make Money

The Street recently published an article explaining the biggest risk factor:

“A bank can freeze an existing HELOC if the amount of equity remaining in the home, as measured by the difference between the credit limit and the home’s value, declines by half. Say you own a $200,000 home with a $100,000 mortgage and a $50,000 HELOC. That leaves $50,000 in equity in the home. A drop in home value to $175,000 would leave only $25,000 in available equity, a 50% decline. Your lender would have grounds to freeze your HELOC.”

If you do receive a HELOC freeze notice, you may be able to seek recourse. Check out my list of ways to revive your home equity line.

See Also:

HELOC Lender Obligations Under the Truth in Lending Act

HELOC Foreclosure

CNBC reports:

“The FBI says HELOC thieves typically use stolen identification to apply online for a line of credit in your name. Then they instruct the bank to wire the funds to their accounts, providing their own contact information in place of yours. That way, the bank unwittingly contacts the thief to verify the electronic funds transfer.

Although the FBI does not track the dollar amount lost each year to mortgage fraud, incidents reported by financial institutions jumped a whopping 31 percent (from 35,617 to 46,717) in fiscal 2007, over the previous year. The sudden spike in HELOC fraud prompted the Mortgage Asset Research Institute, a Virginia-based organization that tracks mortgage fraud, to add identity theft as a category to track.”

According to the article, many experts believe that the shift to home equity fraud has happened because it is now more difficult for identity thieves to take out subprime loans in the name of less credit-worthy borrowers.

Protect yourself from home equity fraud by checking your credit report regularly. Everyone is entitled to see a copy of their report annually at no cost.

See Also:

New Program Detects HELOC Application Fraud

HELOC Identity Theft Scams

The Seattle Times reports:

“First American CoreLogic’s study examined equity as of Sept. 30. It found that 18 percent of all mortgaged properties in the United States were under water. That reflects 7.6 million mortgages…

About 2.1 million mortgages…had so little equity they were within 5 percent of being under water.

The national numbers are heavily skewed by the housing ills of six states: Nevada, where almost half of all mortgage holders are under water, Michigan, Florida, Arizona, California and Georgia.”

Those are pretty sobering statistics, considering that the majority of homeowners make a down payment around 20%. No wonder lenders are becoming less inclined to offer home equity lines of credit.

See Also:

How to Negotiate the Best HELOC Rates and Terms

Don’t Rely on a Home Equity Line to Save You During the Crisis

Why Are Qualified Home Equity Borrowers Suffering?