Where’s Your Home Equity Line?

So you worked hard to secure a home equity line, you always pay both your primary loan and the equity line payments on time, and yet the bank just let you know that you have been cut off.

Or worse, they didn’t even tell you. Rather, you tried to use some money from your equity line with the Visa card attached to it and it was a no go. You think the bank cares that you were left standing in line at Lowe’s with a giant cart full of home improvement products and your card was declined? Think again.

Even responsible borrowers with plenty of untapped equity are getting cut off.

There’s a mass freezing of home equity lines of credit all across the US. It looks like the nation’s lending institutions and mortgage originators are just fine with consumers taking the hit and shouldering most of the costs for the credit mess that they themselves created.

As lenders struggle with losses created from their own bad lending practices, you get to bear the load of the problem as they prevent you from accessing your credit line. Their thought is that declining property values in some markets are putting them at risk of further losses.

Large, nation-wide lenders such as IndyMac Bank, Washington Mutual and Capital One’s Greenpoint Mortgage Unit say that these steps are necessary to protect their bottom line.

Since mid-March, lenders have sent hundreds of thousands of letters to let many of their borrowers know that their home equity lines of credit are frozen. Even borrowers with pristine credit history and large amounts of equity are affected. These letters don’t give any¬†explanation to the borrower about how the bank determined that the property securing the equity line has become devalued and therefore exposes the bank to unnecessary risk.

You may know that most of these equity line arrangements include a contractual agreement that gives the banks the authority to make a unilateral decision to rescind the credit line or to freeze access to the money. Given the tumbling home prices in many parts of the country, this banks seem to think that this is perhaps a last line of defense to protect themselves from additional loss. The dilemma is that some banks are taking such steps even in markets that haven’t seen significant price drops in the local real estate market. In some instances, local markets, such as Boulder, are still seeing rising real estate prices.

You may want to check to see if the bank will refund the fees you paid to secure the credit, but don’t hold your breath. The national trend right now is that banks are unwilling to give this money back.

Fortunately, the Boulder market is holding its own and as banks deal with the backlash from the communities they serve, I imagine we’ll see a correction in this practice as reasonable borrowers with verifiable equity begin to get access to their credit lines again.

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