home equity

Keeping liquid in a home equity freeze

Smith was more fortunate because she viewed her HELOC as a "savings account rather than an ATM." Nevertheless, she was dismayed that a source of money she'd been counting on was suddenly taken away.

"I called them and they were very nice. They said 'If you want to dispute it, you're more than welcome,'" says Smith. "I know for a fact that property values have declined, so why would I spend money on an appraisal? That's not my point. I'm a good customer and I'm being put in a bucket of other people who got into tricky mortgages and are unable to keep up."

In a written statement, Countrywide said it is reviewing home equity lines of credit and making a "determination of the impact of lower property values on existing accounts. This analysis may result in the company suspending borrowers' future access to existing lines of credit."

Lenders and secondary loan risk

Others lenders have made similar decisions because they view equity-backed products as far riskier than primary mortgages.

HELOCs and home equity loans are so-called "secondary mortgages" offered to borrowers who have a primary mortgage. When borrowers default and their home is sold to repay creditors, any money collected goes to lenders of the primary mortgage first.

That means lenders of secondary mortgages can wind up getting repaid far less than they loaned. In some cases, they may receive nothing at all.

This added risk factor means lenders probably will continue to pull back on home equity offers as long as home prices keep falling.

"In areas of the country where price decreases continue, I would not be surprised to see continued reduction in home equity lines of credit," says John Mechem, spokesman for Mortgage Bankers Association. "It makes good business sense for lenders, when home values are declining, to reduce home equity lines."

Lenders who freeze a borrower's HELOC are acting in the interest of the lender and the consumer, according to JPMorgan Chase spokesman Tom Kelly.

"It makes good business sense for lenders, when home values are declining, to reduce home equity lines."

"We're trying to keep borrowers from owing more than their house is worth," Kelly says.

Like many lenders, Chase has tightened its lending standards regarding home equity products. It now requires borrowers to document their income and assets and to have better credit scores.

Borrowers also must have more equity in their home to obtain HELOCs, which are now generally set so the loan, combined with the primary mortgage, exceeds no more than 85 percent of a home's value.

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In areas of the country where real estate value is dropping quickly, borrowing limits could be as low as 60 percent to 65 percent, Kelly says.

Meanwhile, Bank of America is generally limiting HELOCs to 90 percent of home values, and down to 80 percent in places where "there have been consistent and significant housing value declines," says spokesman Terry Francisco. Previously, borrowers could get HELOCs up to 100 percent of a home's value.

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