Financial Times reports:

“The bank’s initiative, which was launched at the end of July, encourages National City customers to surrender their unused home equity lines by waiving fees it would normally charge for closing the line and by writing customers a $200 cheque.

“We are giving customers an opportunity to close their lines without incurring termination fees and then we give them a reward to thank them for their business,” said National City.”

The National City plan is certainly more generous than the lenders who continue closing HELOC lines without notice or option. Although most customers won’t want to close a line for $200, this can be a good deal for customers who were already planning to close a line. Instead of paying the usual $350 cancellation fee, they can walk away with a check.

National City seems to be offering this deal to only some borrowers. But, it is not yet clear what the recipients have in common.

See Also:

List of Lenders Freezing Home Equity Lines of Credit

HELOC Freeze Help

Finance expert Dan Galli explains: 

“…the Home Equity Line of credit has some advantages over PLUS loans or other college loans. Mainly because the interest (up to $100,000) is deductible. However, the interest rate for a line of credit has the nasty ability to rise and fall with market conditions. For this reason, you may want to consider a second mortage with a fixed interest rate. Try not to let paying for these college costs impact on how much you can save for your own retirement. It’s a tricky balance sometimes.”       

Keep in mind that federal student loan rates are often very low. Although these loans are usually not dischargable through bankruptcy, they have flexible repayment options, are considered “good debt,” and do not put your primary residence at risk.

See Also:

Avoid Using a Home Equity Line of Credit for Tuition 

Fewer HELOCs for College Tuition 

CNN Money reports:

“The housing bubble had another perverse effect on our planning: It led us to save less. “Many people thought, ‘I’m wealthier, I already have a big chunk of my nest egg thanks to my house, so I don’t have to save as much,’ ” says Moody’s Economy.com chief economist Mark Zandi.

Using asset gains as an excuse to cut back on saving can be dangerous, especially when those gains come during a period of unprecedented returns. Bloated asset values can be illusory - and temporary. So even if your retirement accounts balloon during your career, keep making contributions. If nothing else, you’ll give yourself a wider safety margin to deal with setbacks.”

In some urban areas, people now owe more on their homes than they are worth. The situation is complicated by the fact that many homeowners withdrew the equity that would remain for extravagant home upgrades, shopping sprees, and other unnecessary expenses.

Hopefully, homeowners will learn to be more cautious with home equity lines and more generous with savings in the future. Retirement takes careful planning, especially in times of unexpected price increases.

See Also:

5 Financially Sound Ways to Use Your HELOC

No Retirement HELOCs for Baby Boomers?

The Arizona Republic reports:

“It also might be smart to check your credit report, evaluate your credit score and make fixes if necessary. Sometimes a drop in credit quality triggers a freeze, not just a declining home value.

Unfortunately, a HELOC freeze itself can lower your credit score because it will show you as having used a larger percentage of your remaining borrowing capacity.”

Most home equity lines of credit are frozen based on declining home values. But, this is certainly something to watch out for.

Remember: you are legally permitted a free copy of your credit report from each national reporting company (Equifax, Experian, and TransUnion) once every 12 months. You can receive these reports by visiting AnnualCreditReport.com or checking out the instructions on the FTC website.

See Also:

Will Taking Out a HELOC Affect My Credit Score?

How the HELOC Freeze Can Damage Your Credit Score

Fortunately, HELOC borrowers are legally permitted to back out of a deal if they notify the lender within three business days. Borrowers do not need to have a reason for backing out; they simply need to inform the lender in writing.

The right of rescission is only available if the home equity line of credit is secured by the borrower’s primary residence. In some cases, the rescission period may be waived if the borrower can prove the money is needed for an emergency.

For more information on the HELOC right of rescission see: Home Equity Line of Credit 3-Day Right of Rescission.

Hopefully, this instruction will encourage banks to avoid freezing individual home equity lines of credit without considering a borrower’s unique circumstance (for example, a home with a high value in an area that is generally declining).

IndyStar recently published an article that details some of the most important laws lenders are being asked to follow. One law borrowers may be particularly interested in is “Regulation Z.”

Here’s how they explain it:

 ”…With limited exceptions, Regulation Z of the Truth in Lending Act prohibits creditors from terminating a home equity line of credit and then accelerating repayment of the outstanding balance. Exceptions include situations in which the borrower fraudulently obtained the loan or failed to repay according to its terms.

Additionally, under Regulation Z, a lender can’t just reduce or suspend access to a line of credit without cause, said Montrice Godard Yakimov, OTS managing director for compliance and consumer protection.

A suspension or reduction of a home equity line must be based on an assessment of the value of “the dwelling that secures the plan,” the OTS said in its guidance. Consequently, a financial institution would violate the law if it attempted to yank credit limits of all home equity credit line accounts in a geographic area where real estate values are generally declining.”

If government regulators are willing to enforce these laws, some borrowers may be protected from unnecessary HELOC freezes.

See Also:

Federal Truth in Lending Laws

Office of Thrift Supervision Warns HELOC Freeze Lenders

FDIC Warns Lenders on Freezing HELOCs

A recent American Banker article explains that lenders should avoid punishing those who would borrow responsibly:

“To be sure, many lenders will say the questionable mortgage lending innovations of the last 10 years provide all the more reason for across-the-board tightening now. The trap in that response, however, is that various groups of borrowers are in very different circumstances. Absent an analytical understanding of differences in customer segments, crisis-mode initiatives are sure to translate into lost opportunities for profitable growth with solid borrowers, lost opportunities to anticipate and cap loss exposure with distressed borrowers, and lost opportunities for effective repayment negotiations in a world where delinquent households generally have multiple creditors standing in line.”

Ignoring responsible borrowers hurts those who have planned their finances with care. But, it also hurts the banks who are already struggling and, in some cases, going under.

See Also:

New List of Lenders Sending Home Equity Line Freeze Letters

How the HELOC Freeze Can Damage Your Credit Score

The Philadelphia Inquirer explains:

“Wachovia credit-line customers whose home equity has declined 50 percent or more received letters in the last several weeks saying that their credit lines had been reduced or blocked, Wachovia spokeswoman Barbara Nate said.

“Our rationale is that we don’t want customers to get in a situation where they can’t afford their outstanding commitment,” Nate said.”

You have to admit, 50% is a huge drop in equity. Homeowners experiencing that kind of decline may have more to worry about that accessing their HELOCs.

See Also:

Wachovia to Freeze HELOCs

The Best HELOC Lenders Ranked

They explain:

“Declining home prices in parts of the country are prompting some institutions to curtail, suspend, or terminate customers’ home equity line of credit.  Today’s guidance emphasizes that institutions taking such actions must comply with federal laws and rules designed to protect customers, including regulations implementing the Truth in Lending Act, Equal Credit Opportunity Act, Fair Housing Act and the OTS nondiscrimination rule.

“A home equity line of credit is an attractive product for many homeowners and lenders,” the guidance said.  “While sound underwriting and effective risk management systems are essential, associations must employ these strategies in a manner that complies with applicable consumer protection laws and regulations.”

This notice comes after a Congressional subcommittee sent surveys to major lenders to judge compliance with the law in May and the FDIC warned lenders about HELOC procedures in the early summer.

See Also:

Are Banks Allowed to Freeze Home Equity Lines of Credit?

FDIC Warns Lenders on Freezing HELOCs

Congressman Questions HELOC Freeze Lenders

CNN Money reports:

“HELOCs can be hard to get right now, but they are cheaper than doing a complete refinance. Recently, the average rate on a HELOC was 5.73%, a point lower than the new jumbo loans. What’s more, HELOC generally have no upfront fees. The rub is that HELOCs are adjustable, but with the economy looking sluggish it’s a good bet interest rates won’t rise soon.”

If you qualify to take out a home equity line and you live in an area that is not experiencing dramatic property value drops, it’s worth looking in to.

HELOCs have great rates now. But there are more stable options such as the fixed-rate home equity loan.

See Also:

Is a HELOC Right for You?

Current HELOC Prime Rate