NewsDay does a good job of explaining just what these design standards entail:

“Universal design is a concept that promotes accessibility, safety and ease of use, especially for older or disabled residents. Features range from nonslip flooring to rollout drawers and step-free entrances.

“There’s an increasing aging population of baby boomers and an aging population in general,” said Judy Pannullo, executive director for the Suffolk Community Council, a Hauppauge-based nonprofit. “That tells us there’s a need for universal design.”

Most home equity lines of credit can be used any way the borrower desires. But, some lenders feel that specified-use HELOCs are a smart way to promote a cause and help homeowners be more responsible with the money they borrow. (Sorry, there’s no using this line for a down payment on a sports car…)

photo credit: John Flinchbaugh

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5 Financially Sound Ways to Use a HELOC

How a HELOC Works

“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.

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The Best HELOC Lenders Ranked

“The banking subsidiary of National City Corp has signed a confidential memorandum of understanding with U.S. regulators, promising to address its rising amount of bad loans, a source familiar with the matter said on Monday.

The memorandum signed by the bank and the Office of the Comptroller of the Currency requires the bank to improve what examiners see as potential problem areas.”

If National City does not improve, it may become subject to formal sanctions.

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The Best (and Worst) HELOC Lenders Ranked

Answers to Common HELOC Questions

Representative Dennis Kucinich called the HELOC freezes “very disturbing.”

“People have had their home equity lines suspended whether or not their credit is good or not, and whether they have sufficient equity in their houses, or not,” he said. “As Chairman of an investigative subcommittee in Congress, I can get answers from the banks.”

The Domestic Policy Subcommittee sent letters to nine major lenders including AmTrust, Keycorp, National City Bank, Charter One Bank, Wells Fargo, Fifth Third Bank, Huntington National Bank, CitiFinancial and JPMorgan Chase Bank. They may send additional letters to other lenders.

The letters ask some tough questions such as:

“If your institution has already notified borrowers of your intent to restrict HELOCs, what were the criteria you used to identify recipients of that notification? How many borrowers received such notifications, and where were these borrowers located, by zip code? Please also provide a copy of the notification and any attachments. What is the nature of the restriction?”

If your institution has initiated or is considering a restriction in home equity lines of credit, tell us what basis for assessing housing values of your borrowers are you using specifically for the purpose of evaluating HELOCs? If this is a proprietary source, please explain the methodology and the name of the vendor

What other loan products has your institution restricted, or is your institution considering restricting, and what steps, if any, has your institution taken in this regard?”

Since most HELOC loan documents include language that allows for limit reductions, it is unlikely that the sub-committee will uncover evidence of illegal actions. However, it will be interesting to see what information lenders release. Up until now, HELOC freeze statistics and methods have not been widely available.

See Also:

HELOC Lenders – More Unpredictable Than Ever

List of Lenders Sending HELOC Freeze Letters

The Associated Press reports:

“Dugan, whose agency oversees large national banks, said the size of the HELOC market is significantly less than that for mortgage loans, reducing banks’ overall exposure. The problem, however, is that banks usually keep the home equity loan on their own balance sheet, retaining all of the credit risk.

The loss rate for home equity loans has traditionally been about 20 basis points (0.20 percentage point), Dugan said, but that figure has climbed rapidly in recent quarters. The loss rate climbed to nearly 1 percent in the final three months of 2007, and hit 1.73 percent in the first quarter of this year.

In real dollar terms, losses on all home equity loans were $2.4 billion in the first three months of 2008, compared with $273 million in the first quarter of 2007.”

These huge losses explain a lot about bank behavior during the past few months. Clearly, reducing HELOC limits, freezing lines, and other tactics have been designed to help stem the tide of future losses.

See Also: List of Lenders Sending HELOC Freeze Letters

However, HELOC lenders haven’t stopped at that. Many customers have been surprised to find their home equity lines reduced while their property value has stayed the same. Or worse, when they live in one of the few areas with rising values.

Some borrowers have been notified that their home equity lines will be closed permanently due to inactivity if they do not submit a formal request to keep it open. Many financially responsible borrowers take out a HELOC as a long-term source of emergency cash. They don’t draw on it for everyday consumer purchases, but open it as a backup cash reserve. One such surprised borrower received this notice:

Dear Borrower,

According to records it has been at least several months since you exercised your right to draw against your Home Equity Line of Credit. Because of this inactivity, we would like to give you the opportunity to terminate your HELOC earlier than the agreement permits. Doing so will allow us to report “account paid” to the credit reporting agencies, lowering the amount of outstanding indebtedness that is reported about you.

If we do not hear from you within the next 15 days, we will proceed to terminate your HELOC. If you would prefer that we not terminate the agreement, please remit a written request…

They claim it’s an “opportunity,” but require the borrower to mail a request if he doesn’t want his HELOC terminated in the next 15 days. Keep in mind, HELOCs aren’t as easy to get as credit cards. The borrower probably had to supply documentation, have his credit checked, and pay fees in order to open this line. Lenders may be worried about borrowers drawing too much on their HELOCs, but they’re also targeting those who draw too little.

While all of this is going on, many HELOC lenders are still looking for new customers. Sometimes the targeted homeowners are in the same areas that current customers are receiving HELOC freeze notices. Home equity loan advertising is still strong, both online and through the mail.

One homeowner reported this tale:

“I own a vacation condo in Naples, Fla., where local real estate broker Glenn Ginsburg of A Delta Realty of Naples reports condo prices have declined 7.7% to $300,000 in the first quarter of 2008 from the same quarter in 2007. Yet my lender, Countrywide, just sent me a letter this week inviting me to cash out some of the equity in my place, which they mysteriously figure at $54,302. (The fine print on the back of the offer says this sum is based on “statistical data,” not on an appraisal, and the solicitation isn’t a commitment on their part).

I bought my home in 2004 for $220,000, and judging by recent sales of identical models, it would currently sell for around $250,000.”

The bottom line: you can’t predict what your HELOC lender is going to do. Some customers still find it simple to take out a home equity loan. Others can’t hold on to what they already have – even if they follow the rules. The only thing HELOC borrowers can do now is wait out the storm and hope the market will stabilize.

See Also: HELOC Freeze Help

Housing Wire explains the latest:

“Washington Mutual, Inc. has either suspended or cut down a total of $6 billion in available home equity lines of credit in the latest effort by a major bank to reduce its exposure to the mortgage mess. The cuts, which were first reported last week by National Mortgage News, affect an unknown number of customers; the bank has declined to identify the number of affected customers to the press.”

However you look at it, that $6 billion represents a lot of customers who have received home equity line reductions. Since the letters were mailed last week, almost all WaMu customers are now aware of their status. If WaMu is your lender and you didn’t recieve a HELOC freeze notice, you’re probably in the clear. For now, at least.

See Also:

Lenders Freezing HELOC Lines

How the HELOC Freeze Can Damage Your Credit Score

Here’s the latest update.

Lenders Freezing Home Equity Lines of Credit

Countrywide (recently froze almost all HELOCs in Las Vegas)

Washington Mutual (sending more letters this week)

IndyMac Bank

Capital One (Greenponing Mortgage Unit)

Bank of America

Chase

CitiGroup

National City

Suntrust

USAA Federal Savings

AmTrust Bank

Wachovia

It’s important to note that these lenders are not freezing all of their customer’s HELOCs. Certain customers are receiving freeze notices when the lender determines that their property value has declined. The value is generally based on the lender’s AVM (automated valuation model) and not a physical appraisal.

Some mistakenly believed that the HELOC freeze would end in January. However, borrowers are still receiving notices. Since property values are continuing to decline, it is safe to assume that the HELOC freeze will continue.

See also:

What to Do if You’re Hit By the HELOC Freeze

How the HELOC Freeze Can Damage Your Credit Score

“Washington Mutual, Inc. has slashed or suspended $6 billion in available home equity credit to its customers in an effort to reduce its risk in a flailing housing market.

If they haven’t already been notified, WaMu’s customers across the country will learn of the change to their credit availability in a letter mailed to them in the next several days. The bank declined to disclose how many customers will be affected…

According to a statement released by the company: “We will continue to evaluate home equity lines of credit in relationship to the amount of equity a customer has in their home and, if appropriate, will lower the line amount according to WaMu’s line management guidelines.”

These notices are being sent without a formal appraisal of the properties. So, if you live in an area experiencing declining home values, your chances of receiving a HELOC freeze letter are high.

If you plan on using your HELOC line within the next few months, you may want to withdraw and invest funds now. If you’ve already received a notice from WaMu, it may be too late to withdraw. But, there are still a few options available including requesting a review of your home’s assumed value or refinancing with a different lender.

See Also:

How the HELOC Freeze Can Damage Your Credit Score

Which Lenders are Freezing HELOC Lines?

“Homeowners’ pain is acute in Las Vegas, where property values soared 50 percent or more during 2004 and 2005 and since have plummeted. Las Vegas housing prices declined 23 percent in February, leading 20 U.S. cities tracked by the S&P/Case-Shiller Home Price Indices. Nevada had the highest U.S. foreclosure rate in March: one of every 139 households…

Amid flashing neon signs along the Vegas Strip, residents are losing access to credit that might have financed businesses or bought cars and other goods.

As many as 15,000 people in Las Vegas, or 5 percent of the total homeowner population, had credit lines suspended by Countrywide and other lenders, said Brad Henderson, president of Henderson, Nevada-based mortgage banker and broker Evofi One.”

5% of the population losing access to their HELOC lines is no small deal. Unfortunately, many of these people were probably relying on their HELOCs to be a safety net during financial trouble. Now that financial trouble is here, that doesn’t seem like the most reliable financial planning method.

See Also:

What to Do if You’re Hit by the HELOC Freeze

Countrywide HELOC Loans