A recent release from his office explains:

“…Mike Haridopolos today called for hearings in Tallassee to investigate claims that after banks received hundreds of billions in federal bailout money they squeezed consumers and fraudulently or arbitrarily reduced Home Equity Lines of Credit (HELOC) to improve their own bottom lines.

‘I have heard the stories of this happening across our state and our country, and the courts are filled with lawsuits,’ says Haridopolos (R-Merritt Island). ‘This needs to be investigated because if true it’s outrageous. The very banks that are bailed out with taxpayers’ money then stick it to homeowners?’

Haridopolos is calling for hearings in Florida and is also asking that Congress investigate the claims of wrongful HELOC suspensions.

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How to Protect Your Credit in Case of a HELOC Freeze

The San Francisco Chronicle explains:

“…Most second trust holders are reluctant to institute foreclosure proceedings. There is an expense involved (such as advertising, auction and legal fees) that the HELOC bank may not want to spend if they believe the foreclosure sale will not generate any money for them.

You or your attorney may want to discuss the situation with the HELOC holder and see if you can work out some kind of amicable resolution.”

Because the HELOC is a second lien, it is second in position to collect any money from a foreclosure sale. HELOC lenders know that they will be paid after the lender for your original home loan recovers lost costs. In some states a HELOC loan becomes an unsecured lien against the recipient. However, even in these areas HELOC lenders are often willing to work with delinquent borrowers.

The bottom line: If you refuse to pay back your HELOC, the lender will eventually start foreclosure proceedings. But, many lenders are willing to help borrowers get back in good standing, particularly in today’s market. If your HELOC bills are past due, call your lender and see what can be done.

photo credit: TheTruthAbout…

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The HELCO Foreclosure Process

Answers to Common HELOC Questions

Liz Pulliam Weston of the Los Angeles Times explains:

“If you’re convinced you’re on track there and you don’t have any credit card debt, the next step normally would be paying down that home equity line. In today’s environment, however, you might find your lender lowering your limit as soon as you start to reduce your balance. Rather than freeing up credit that you could use again in an emergency, paying down your HELOC may actually reduce your overall financial flexibility…

If your loans total more than 60%, however, or if housing values are falling fast in your area, consider instead building up your savings.”

Generally, I’d say that building up your savings instead of paying back an interest-accruing debt an awful idea. But, in today’s market it actually makes sense. Holding on to the ability to have a HELOC is a smart choice for a lot of borrowers facing financial instability. Plus, by placing unused HELOC funds into a high-interest savings account, much of the loss can be mitigated.

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How to Un-Freeze Your HELOC

Countrywide Freezes More Home Equity Lines

The housing plan has a provision that allows “mortgage cram-downs,” a highly controversial practice that allows bankruptcy judges to alter the terms of a mortgage at their discretion. Basically, when the plan becomes law, you could file for bankruptcy and have your mortgage modified and your HELOC payments reduced or even eliminated all together.

Currently, bankruptcy courts can not change the terms of a mortgage for a primary residence. Additionally, many states have recourse laws that allows lenders to go after a delinquent HELOC borrower, even after a property has been sold. In such cases the borrower is personally responsible to pay back the balance of a home equity line of credit and can even have his wages garnished until the debt is satisfied.

USA Today reports on the announcement of the new foreclosure prevention plan and how these changes will work:

“That’s the rule for investors who own two, three and four homes,” Obama said Wednesday. “It should be the rule for ordinary homeowners, too, as an alternative to foreclosure.”

The change in the law would empower judges to lower interest rates, extend the repayment period, and change the principal amount owed on the mortgage to what is determined as the home’s fair market value…

Many homeowners have two mortgages because they have taken out a home-equity loan to pay off their credit card debt.

Under the plan, the bankruptcy filing could wipe out the home-equity loan, enabling the family to keep their home, Lee says.”

Critics of the housing bill worry that too many borrowers will have their mortgage and home equity debt wiped out, even if they are capable of making their monthly payments. However, the announcement of the program comes as a relief for many HELOC borrowers in recourse states. In some cases, these borrowers owe tens of thousands and are “upside-down” on their mortgages due to declining home values. Even if they sold their properties, such borrowers would still owe their home equity lenders. In the coming months, they hope to have their HELOC debt discharged and avoid the burden of paying it back from their own pockets.

photo credit: respres

See Also:

How HELOC Foreclosure Works

List of Non-Recourse Mortgage States & Anti-Deficiency Statutes

NY Daily News reports:

“Looking to get a loan for school? A car? A house? Fat chance.

Billions of dollars have flowed into bank vaults, but billions of dollars are not flowing out, at least not to borrowers — at least not yet.

Most banks are making fewer loans and employing stricter standards on borrowers than they did a year ago, despite the multi-billion dollar bailout of the financial industry.”

On the positive side, many major lenders such as Countrywide are continuing to advertise for new HELOC customers. Most lenders only want the best-of-the-best, but they’re willing to put some money in to find these credit worthy clients.

photo credit: TheTruthAbout…

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Will Federal Rate Cuts Affect Your HELOC APR?

Zillow reports:

“As home values declined through 2008, more American homeowners have become underwater on their mortgages. At the end of the year, one in six (17.6 percent) of all homeowners had negative equity. This number rose from the end of the third quarter, when one in seven (14.3 percent) homeowners was underwater…

Home values in the United States fell for the eighth consecutive quarter, declining 11.6 percent during 2008 to a Zillow Home Value Index(1) of $192,119, according to the fourth quarter Zillow Real Estate Market Reports(2), which encompass 161 metropolitan areas.”

With numbers like that it’s no wonder that so many lenders are freezing and canceling home equity lines of credit. There simply isn’t enough money in borrowers’ homes to secure all existing second mortgages.

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Answers to Common HELOC Questions

What to Do if Your HELOC is Frozen

The Associated Press explains:

“Many banks have made it harder for borrowers to obtain all kinds of loans over the last three months despite a $700 billion federal bailout program and a flurry of other bold moves to stem the worst financial crisis to hit the country since the 1930s…

For consumers, about 40 percent of banks reduced the size of existing home equity lines of credit, and roughly 35 percent trimmed credit card account limits.”

Those figures are huge. But, they may not come as a surprise to the thousands of borrowers who received line reduction or cancellation notices in their mailbox during the past year.

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Are Lenders Freezing Home Equity Lines Illegally?

Which Banks Are Freezing HELOCs?

HELOC Freezes Continue

The recession has caused fewer homeowners to apply for HELOC loans and more people to curtail their spending (presumably, some of those spending reductions will help current HELOC holders pay off their existing lines).

The New York Times reports:

“The United States economy shrank at its fastest pace in a quarter-century from October through December, the government reported on Friday, as consumer spending and business investment collapsed, signaling more economic contraction in the months ahead…

And American consumers, who took on home equity loans and large amounts of credit card debt to finance their lifestyles earlier in the decade, curtailed their spending for a second consecutive quarter. Consumer spending, which typically accounts for two-thirds of economic growth, fell 3.5 percent in the quarter, after decreasing 3.8 percent in the third quarter.”

There are certainly legitimate uses for a home equity line. However, reckless spending is coming back to haunt homeowners who withdrew without considering the future.

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Is a HELOC Right for You?

Printable HELOC Comparison Worksheet

5 Financially Sound Ways to Use Your HELOC

But, others are suggesting that panic-stricken withdrawals are a bad bet. KSN News reports:

“If they are paying interest just to hold that money to me that’s counterproductive,” said Darryl Bauchert of Columbus Financial Group.

Also in these tough times, losing a job isn’t all that unrealistic and that means you may not be able to pay for your home.

Now you’ve secured a loan with an asset that you may lose.”

In my opinion, holding HELOC money can be smart – but only if you plan to use the funds in the next six months or so. There’s no point in paying interest on money you’re not using. But, as we’ve seen, there is definitely a risk of not being able to withdraw funds in the future.

See Also:

Will a Home Equity Line Save You During the Crisis?

HELOC Foreclosures

Baby Boomers Suffer From Home Equity Line Withdrawals

Who’s to blame?

According to the Washington Times, it depends on who you ask:

“Why the sudden stiffening of HELOCs? It’s the economy, banks say.

“Banks are in the business of lending, says James Chessen, chief economist for the American Bankers Association. “They have to weigh the likelihood that they are going to be repaid. The weaker the economy, the greater the risk.”

Meanwhile, some economists point to consumers.

“Basically, we spent much of the last decade with consumers aggressively using HELOCs with rapid balance growth,” says Scott Hoyt, an economist with Moody’s Economy.com.”

At this point, finger pointing doesn’t do much good. However, it is important to understand how the HELOC crisis came to be so that we can avoid defaults and unexpected freeze letters to borrowers in the future.

See Also:

Why Are Qualified Home Equity Loan Borrowers Suffering?

How the Home Equity Line Freeze Can Damage Your Credit Score