home equity

Keeping liquid in a home equity freeze

For homeowners, it's time to seek new financial shelter.

In recent years, homeowners have used their dwellings to obtain billions of dollars in extra cash through home equity products.

However, plummeting real estate prices have forced lenders to trim, and sometimes freeze, home equity lines of credit, also known as HELOCs. Lenders are also offering fewer home equity loans.

Bank of America, JPMorgan Chase, Washington Mutual, Wells Fargo and Countrywide Lending are among the big-name lenders notifying some clients that their home equity lines have been frozen.

Other clients have seen access to their lines of credit reduced, in some cases by as much as 40 percent.

The chill began when credit conditions tightened in 2007 and continues to evolve, according to Keith Gumbinger, vice president of HSH Associates, a real estate publishing firm.

"The big guys made a splash because they affect (the) most borrowers, but the tightening is going on throughout the entire industry," says Gumbinger. "It's an ongoing process."

Nasty shock for borrowers

As the names imply, home equity lines of credit and home equity loans are backed by borrowers' equity -- that is, the difference between what a property is worth and how much the homeowner still owes on the property.

With HELOCs, individuals are approved for credit lines they can access on an as-needed basis. A HELOC is a revolving line of credit, much like a credit card, and the interest rate fluctuates over time.

With home equity loans, borrowers get money upfront in a one-time lump sum that is paid off over a set amount of time. The loans feature a fixed interest rate and the same payments each month.

Since 2001, homeowners have obtained more than $2 trillion in home equity lines of credit and home equity loans, according to Inside Mortgage Finance, an industry newsletter. In 2006, borrowers tapped a high of $430 billion from home equity products. In 2007, borrowers tapped $355 billion, the first year equity volume dropped since the newsletter began tracking these products in 2001.

Solutions to a frozen HELOC

If your HELOC is frozen, take the following steps to keep the cash flowing:

  • Appeal the lender's decision.
  • Search for other lenders who may offer HELOCs.
  • Amass emergency cash reserves.
  • Reduce spending on luxury items.

Nina Smith was among those who obtained, but never tapped, her HELOC. Instead, Smith -- who owns properties in Nevada and California -- thought having an open line of credit for a home she uses as a rental investment in Phoenix would be a smart way to access cash in case of some big emergency.

"Obviously, I have plenty of savings and investments, but I like to have someplace where I have cash that's liquid. It's my backup to my backup," says Smith.

Not anymore. In February, Smith was among 122,000 borrowers who got letters from Countrywide Lending informing her that she couldn't use her credit line after all.

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When Smith wrote about the experience on Queercents.com, the financial Web site she founded for gays and lesbians, the response was immediate. More than 20 homeowners responded with similar stories, with many telling her they'd been relying on their HELOCs to get by.

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