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.

See Also:

Answers to Common HELOC Questions

What to Do if Your HELOC is Frozen

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?

“Rates are at their lowest levels in over 3 Years — there’s never been a better time to apply.”

That may be true for borrowers who have excellent credit, hold significant equity, and live in areas with stable home values. But, I’m afraid those who don’t meet these requirements won’t get the lowest rates in three years. They’ll be lucky if they can find a HELOC lender offering a loan with any rate.

For those who do meet the new, more stringent guidelines, there are some benefits to taking out a HELOC now. In addition to low rates, Wells Fargo is offering loans with no bank closing fees and a quarter point rate discount for customers making automatic payments.

See Also:

The Best HELOC Lenders Ranked

CNN Money reports:

“The overall price declines reported by Case-Shiller have been remarkably consistent over the past two years. Prices on the 20-city index have dropped for 21 straight months, since July 2006. The 10-city index has fallen every month since June 2006.

What’s more, recent drops have been particularly steep. The 20-city index fell 2.2% in March, 2.6% in February and 2.3% in January, and is now it down another 1.4%.

“In the bubble markets, we continue to see very rapid rates of price declines,” said Baker. “If anything, it may be accelerating.”

Fortunately, not all borrowers are affected by these declines. In a very few areas, property values are actually increasing.

See Also:

The HELOC Freeze Continues

Understanding the Mortgage Crisis and the HELOC Freeze

Many news outlets have picked up the story, some indicating that the new statistic is a result of a declining economy. The truth is more complicated, however. While homeowners do have less equity, they also own property at significantly higher values than those of a decade ago. (See this chart from the New York Times).

The MSN MoneySmart Blog shares further insight from Michael Rizzo, a senior economist at the American Institute for Economic Research:

“We contacted Rizzo with a couple of questions, and here’s what he had to say: “I just wanted to point out that 60 years ago, homeowners (in aggregate) owned a large percentage of a small pie and while homeowners’ share of the pie today is much smaller (leverage making up nearly half of housing values), the pie is substantially larger. Would you rather own 80% of $800 or so billion or 50% of $5 trillion? The point is to get people thinking.”

That certainly provides a new perspective for those concerned about the home equity situation.

HELOCs and home equity loans may be to blame for some of the shrinking equity. Other causes include high home costs and the low down payment options available during the recent housing boom.

See Also: How a HELOC Works

How can this happen?

Since a HELOC is based on the amount equity in the borrower’s home, most lenders reserve the right to reduce the credit line should the home value decline. During the housing boom home values skyrocketed and borrowers didn’t have to worry about shrinking equity. Now, in a declining real estate market, lenders want to make sure that they do not lend to people who are unable to pay the money back. (See: How to Qualify for a HELOC).

Who does it effect?

According to a recent MSN report, HELOC borrowers with many of the top national lenders have received letters notifying them of changes. In January 122,000 Countrywide customers were notified that they will not be able to withdraw additional money from their HELOCs. Chase, Washington Mutual, and Bank of America are currently reviewing HELOC accounts to make sure credit limits are in line with property values.

How can it be avoided?

If you’re considering taking out a HELOC, it’s not too late. Most lenders are not as lenient with loan terms these days (i.e. they may give borrowers a credit line of 65% of their equity instead of 95%). However, now is a great time to get a low interest rate. The only way to avoid potential credit limit freezes is to take out a loan with terms in the borrower’s favor. Some HELOCs make it very difficult for the lender to freeze or reduce the line. Carefully review all HELOC terms before deciding on a loan. (See: How to Get the Best HELOC Rates and Terms).