“Home equity [loan] deterioration has been much more rapid than we predicted. Our portfolio has a lower loss rate than most but the rate of increase has been pretty substantial. And the severity of loss is much higher than in any other period because of the dramatic house price declines. You’re going from a secured product to an unsecured product.”

When a home equity line of credit is greater than the value of the borrower’s property, the line is no longer secure. If the borrower defaults or the property goes into foreclosure, the bank cannot recoup the entire loan amount through a property sale.

Even if the borrower’s total mortgages do not exceed the property value, the second mortgage lender may not be able to recoup the cost of the loan from a sale. Precedence always goes to the original mortgage holder first.

Since second mortgages are generally recourse loans, banks may be able to pursue delinquent borrowers personally after the property is sold. However, borrowers who have just lost a home to foreclosure will almost always have trashed credit scores and little incentive to pay back what is owed.

See Also:

HELOC Foreclosure

List of Non-Recourse Mortgage States

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

Here are the results, on a scale of one to one-thousand:

Bank of America: 811
SunTrust: 809
Wachovia: 807
Chase: 791
Industry Average: 780
WaMu/Washington Mutual: 773
CitiMortgage/Citibank: 762
National City Bank: 756
Wells Fargo: 755
Countrywide Home Loans: 728

Bank of America takes the lead, two points ahead of SunTrust. Quite a bit below the industry average trails Countrywide, a whopping eighty three points behind.

You can’t learn everything about a HELOC lender from a survey like this, but it does provide an excellent starting point.

See Also:

HELOC Customer Satisfaction Increases in 2008

Lenders Sending HELOC Freeze Letters

“Bank of America Corp. warned Tuesday that its losses on home-equity loans would be worse than it predicted just three weeks ago, adding to evidence that more consumers are falling behind on debts…

At an investor conference in New York, Liam McGee, Bank of America’s president of global consumer and small-business banking, said customers were feeling “significant economic pressure” as deflating home prices left little equity for consumers to borrow against.

He predicted that losses on the bank’s home-equity loans would top the 2%-to-2.5% range projected last month.”

Although many of their own customers are defaulting on their HELOCs, Bank of America is still going through with their acquisition of Countrywide.

See Also:

Is the HELOC in Decline?

Which Lenders are Freezing HELOC Lines?