Thursday, January 31, 2008

Beach Cities: Is Your Home Equity Line of Credit Frozen?

The rumors have been out and about for two weeks or so about lenders freezing Home Equity Lines of Credit ( HELOCS) . It now appears that the rumors in some areas are true. Brian Brady tipped me to Countrywide freezing HELOCS on customers without notice. It seems that Chase may also be freezing home equity loans.

What does that mean to homeowners with HELOCS....Let's say you took out a $100,000 line of credit to remodel the kitchen and figured this would be a good way to finance the project. Perhaps you have drawn up preliminary plans and bought some items but haven't planned to actualy get the ball rolling until the middle of February when the contactor finshes his other project. Perhaps you have used $10,000 of your $100,000 line of credit and have $90,000 left to finish the project.

You might just want to wait to knock out your existing kitchen until you make darn sure your lender hasn't decided to freeze your line of credit. Apparently you are not going to get any notice or warning.. just a letter in the mail after the fact. This could be a bit of a problem if you are in the middle of a major kitchen or bath remodel and your funds to finish the project vanish.

Maybe you took out a line of credit to use to pay for college for your child thinking that taking a bit out each year made more sense then taking out the entire amount in one lump sum. If the line of credit dries up so may your child's college education.

The claim is that lenders are only doing this in areas where they feel prices have fallen or are going to fall. What you don't know is whether they are going by zipcode...if that's the case the Beach Cities are doing fine... or by area.... Los Angeles County as a whole is seeing prices fall.

Now might be a good time to check in with your bank and find out what is happening with their programs. You can bet if one bank is doing this and it works the rest will follow.

Here's a little something else to think about... As Brian and I were discussing this yesterday; he noted that not only was this unprecented but might be against the terms of the HELOC. He said that the only time he had ever heard of this was if a lender went into bankruptcy then lines of credit would be frozen. My brain immediately wondered if maybe BofA is backing out of the Countrywide purchase and CFC is freezing lines of credit in anticipation of declaring bankruptcy. There is a lot of speculation that BofA is not going to complete the purchase...


Anonymous said...

this is not a CFC issue. their 4Q was actually not that bad. the stock is up significantly since then as the arbs have decided the probability of consummation is higher.

also, JPM announced today that it is restricting HELOC's in declining markets (including LA) to 70% LTV's. i would expect WM, IMB, WB and others to follow suit shortly.

unfortunately, the banks will not apply this by ZIP code. the reason is that this would violate anti-redlining laws. the word in industry legal circles is that the roll backs have to be applied ath the MSA level to avoid legal liability. hence, all of LA is going to get squeezed, including the south bay.

Kaye Thomas said...

Anonymous 5:11
Thanks for the update.. Interesting that CFC posting a fairly significant loss is considered to be doing not that bad...

I knew it was a matter of time before other banks did the same once Chase also began freezing credit lines.

I know the loan service part of CFC is worth a lot but am still not confident that BofA will complete the take-over..

Brian Brady said...

Two thoughts, Kaye:

1- Readers, if you're were counting on any of that HELOC money, take it out NOW.

2- the increased conforming loan limits may be able to handle the demand frozen HELOCs creates.

Kaye Thomas said...

Good point about taking HELOC now.. If you were planning on using the money to renovate your home take it now before it is gone..

Anonymous said...

Sorry to get on my high horse, but it is fool-hardy to pull the money out unless your really need to....and pretty appliances have traditionally been a bad investement in the long run

The reason they are doing this is because they are expecting declining values.

Maybe it would be better to do things the "old fashioned way" (ie, save the money) if you meet any of the following conditions:

1) Think you might move in the next few years
2) Think your job or income is not secure
3) Don't have money saved for a rainy day
4) Might have "life change" such as new child.

Of course, yes, pull all the HELOC money out and go to Aruba for six months if you think that's a good idea.....there is a reason for tightening the standards.

Does anyone remember about 10 years ago it was pretty hard to get money out of your house unless you really were doing improvements?

Wonder why that was?

My guess is vacation prices will be DOWN next year.

Kaye Thomas said...

Anonymous 5:58,
You are right if you don't need the money best to leave it alone. I agree that using a HELOC for vacations or other rather frivolous choices is not a wise financial move.

However there are good reasons to use a HELOC. Many people utilize a HELOC as the interest is tax deductible. If you have funds tied up in another investment it might more sense to leave them alone and use an equity line of credit..

If you have a HELOC and are using it to fund a project then it would be a good idea to take out the amount you need to finish the project before you lose access.

Anonymous said...

About this maybe being against the terms of the HELOC, read the fine print. They can do pretty much anything they want, including calling the credit when they want.

Why should that be a surprise? Isn't it THEIR money? When we pull it out, we are not pulling out OUR money, we are BORROWING money against the supposed equity of the home.

Banks are simply stating that they expect house prices to fall, and to tighten up and limit losses in advance.

If the HELOC is tied to a subordinating loan, it of course gets wiped out in case of foreclosure.

Kaye Thomas said...

Anonymous 5:42,
You are absolutely is the bank's money. However I did think there would be something in the contract that they had to give notice before an action to rescind as opposed to after the action.

Anonymous said...

Look, we are in a credit contraction and that is how it goes. Right now major credit companies are turning down ~2/3 of credit card apps.....companies want to play it safe.

Now, the downside to this is that access of credit is dropping quickly.....this can turn housing declines into a vicious cycle as losses lead to additional tightening and an additional round of losses. This is the consequence of exess.

Kaye Thomas said...

Anonymous 8:09,
We are definitely in a credit crunch but from what I'm hearing from people in the business it is not due to a lack of money but to concerns about risk.

It's easy to blame the problem on the housing crisis but much of what is deemed a credit problem is more a consequence of how mortgages were packaged and sold then the actual mortgages themselves.

The creation of hedge funds and how they were packaged and marketed have as much to do with the problem as some guy who was given a loan he couldn't qualify for or afford.

I'm not certain what the answer is but it seems to me that closing the barn door after the animals are gone is not the best solution.