Courthouse News Service reports:

“Yakas filed a class action, alleging breach of contract and unjust enrichment. She said Chase breached the HELOC in three ways: by failing to obtain an appraisal by a licensed appraiser, by using the unreliable AVM to assess her property value and by charging her a $20 annual fee after it suspended her credit line.”

It’s about time that someone stood up for HELOC borrowers’ rights. Lenders can certainly limit or even freeze HELOC lines if there is not sufficient equity remaining in a property. However, it is unfair to freeze HELOCs in batches or based on these so-called “automated valuations” that do not require any actual appraisals or personal considerations.

photo credit: The-Lane-Team

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HELOC Freeze Help

Monitor Bank Rates gives this concerning antedote:

“A close friend of mine had his HELOC closed by JP Morgage Chase on a home he and his wife owned. They didn’t owe any money on the HELOC but the interesting part of this story is they didn’t owe any money on their home at all. No primary or secondary mortgage balance, they owned their home outright but Chase still closed their home equity line of credit.”

Wow…a HELOC cancellation while the homeowner owes nothing? That’s definitely worth taking note of.

photo credit: Thairms

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HELOC Freeze Help

WLNS News reports:

“For those carrying a balance, fortunately, most credit reports differentiate credit cards from HELOC draws. A HELOC’s unavailability should not have a significant effect on a credit score. To compensate for the lack of a HELOC as an emergency resource, do whatever you can to build an emergency fund with savings. Start with only $50 a week if need be, and add more when you can.”

In some cases, it is even possible to have a HELOC loan reinstated by petitioning the lender.

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How Does a HELOC Affect My Credit Score?

How to Un-Freeze a HELOC

Examiner.com reports:

“…What is the purpose of the HELOC? If it’s a rainy day fund like it is for my client, then the impact is low if a bank cancels a HELOC. If someone is using their HELOC to finish a major home remodel, then the impact of a freeze would be large. If you’re in the situation where you need the HELOC now, please see a competent financial professional who can help you figure out the costs and risks of taking on more debt right now.”

In some cases, borrowers are withdrawing funds from their home equity lines of credit to avoid the consequences of a potential freeze in the future. However, this option can be unnecessary and costly for many homeowners. Taking the time to analyze your situation can help you make the best decision.

photo credit: diegodacal

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More Articles on the Home Equity Line of Credit Freeze

Smart Money reports:

“…Many lenders are not making much money off HELOCs. The cut-throat competition during the mortgage boom had lenders slashing rates to well below the prime rate, with no floor on how low they could go, says Frank Ruzicka, a mortgage banker at Cornerstone Mortgage in St. Louis. “I don’t think their models ever predicted that rates would get this low,” he says. Ruzicka’s own HELOC is now at 3%. His lender, Chase, froze his credit line in October 2008.”

Most HELOCs are pegged to the Prime Rate (i.e. they adjust every time this national index rate adjusts). Some HELOCs are a few points lower than prime, some are a few points higher. Creating HELOCs that were a point or so below prime made sense when the rate was around 6%. But, now that prime is at 3.25%, lenders aren’t making much from those credit-worthy borrowers who qualified for the below-prime rates.

For a more in-depth discussion of how HELOCs work in relation to the Prime Rate, see: How to Negotiate the Best HELOC Rates and Terms.

A recent report summarized on the Calculated Risk blog explains:

“Going forward, the largest increases in the share of negative equity will most likely occur in states that have not yet experienced deep declines. The reason: the boom/bust states already have very high negative equity shares and incremental declines in home prices will result in smaller negative equity share increases relative to other states given the same decline in prices. This means that as prices continue to decline in 2009, the rise in the negative equity share of states outside the boom/bust regions will begin to accelerate more quickly relative to the boom/bust states.”

What does this mean for potential HELCO borrowers? If you’re considering taking out a home equity line of credit, you may want to do so before your area faces an increase of negative equity. You may also want to consider other options, such as traditional home equity installment loans, to avoid the possibility of HELOC line freezes.

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Is a HELOC Right for You?

HELOC Freeze Help

First, your HELOC lender may be able to charge you an early cancellation fee.

Second, your home may appraise for a lot less than it did when you originally took out the line. Since home values have dropped nationwide, there’s a good chance that your home is worth less. In this case, your new HELOC could have a lower limit than your current one, even counting the reduction.

In some cases, the benefits of opening a new line outweigh the risks. Some homeowners live in areas that were not hit hard by the real estate bust. If they don’t mind paying a termination fee, a new HELOC could help them meet their financial goals or serve as a source of emergency funds.

See Also:

Facing a HELOC Freeze? Here’s Where to Send Your Complaints

Are Lenders Freezing Home Equity Lines Illegally?

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

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