Grab Your HELOC Before the Freeze

Lenders across the nation are suspending withdrawals from equity lines of credit, according to the North County Times. The process usually begins with a letter or a phone call, after which the borrower can no longer make withdrawals on their remaining HELOC balance. Countrywide Financial, Wells Fargo, Washington Mutual and JPMorgan Chase have all issued statements that they have started halting equity lines in response to the decline in home values. Together these firms represent the bulk of the home loan market.

A major critique of this approach is that it punishes those who have maintained a credit balance in their HELOC account. Those who have been frugal with their credit or maintain a line of credit for emergencies could lose their safety net overnight. Individuals who have used up all available credit will not be affected by these actions, and may become the unintended beneficiaries of loan terms that would never survive the underwriter.

One worst case scenario of a HELCO freeze would be a forced sale or foreclosure on a home if the credit was needed or had already been allocated. This would certainly give the impression of banks making a bad situation worse. At the same time, in the event of a foreclosure the original mortgage is paid off before the 2^nd loan, so the HELOC lender could already be facing the loss of the balance.

A California mortgage broker, who spoke on the condition of anonymity, reported that his clients had been contacted by both Washington Mutual and Wells Fargo regarding the suspension of HELOC withdrawals. He stated that he is advising clients to immediately withdraw any available HELOC funds that will be needed for future expenses. While not wanting to taint relationships with banks, he nonetheless feared for clients being placed in financial peril with little warning. In addition, to date there has been no adverse actions against those who have withdrawn their full HELOC balance.

Unfortunately, having a good credit rating does not provide protection against having HELOC withdrawals suspended. The lender is primarily concerned with tumbling home prices creating an unacceptable loan to value ratio, or a negative value situation where loan balances exceed the remaining equity in the home. The lender's goal is to prevent a deteriorating loan portfolio from getting worse. In the end, there is little the consumer can do as their credit is tied to regional property values - unless of course they grab available funds before the freeze.

Zach Fox, "Lenders freeze equity lines in response to tumbling property values", North County Times