Many owners feel pain as banks cut back on Home-Equity loansLenders across the nation are reducing or even canceling the home equity lines of credit held by many homeowners.
DEAR MR. MYERS: I obtained a $60,000 home-equity line of credit two years ago, but have never used it. Last week, I received a letter stating that the credit line is being reduced to $10,000. It gave no explanation. What's going on here?
ANSWER: Many homeowners across the United States are seeing their preestablished home-equity lines of credit - commonly called HELOCs - unilaterally reduced or even closed by their lenders as banks try to stem their loan losses and cut their risk against slumping home values. The problem is becoming so widespread that I'm devoting this column to answering some of the questions asked about this:
DEAR MR. MYERS: Which homeowners are most likely to get hit with a credit-line freeze?
ANSWER: Borrowers with recent late or missed monthly payments on their equity loans are prime candidates to have their lines reduced, canceled or - even worse - wind up in foreclosure. Most equity lines take the form of a second mortgage, so the lender has the same right to foreclose as the bank that holds the first loan does.
Some contracts for home-equity lines also allow the lender to freeze or cancel the account if the borrower falls behind on unrelated bills, such as credit cards or an automobile loan.
DEAR MR. MYERS: My credit score is almost perfect, and I have never missed a payment on any of my debts, but my lender is still planning to reduce my existing credit line by about 40 percent. Is this legal?
ANSWER: Some loan contracts allow the bank to eliminate or reduce a line even if the borrower's payment record is perfect. Other agreements do not. You must reread your original loan paperwork to get a specific answer to your question.
Your situation shows just how cautiously banks are now handling equity loans, even for borrowers with outstanding credit.
Just a year or two ago, before home prices turned soft, many banks were allowing customers to borrow up to 100 percent of the value of their home through a combination of a first mortgage and a HELOC. Now, the limit for even the most creditworthy borrowers is generally 90 percent.
DEAR MR. MYERS: Can I fight this?
ANSWER: Sometimes. If you have fallen behind on payments, you breached the terms of the contract. The bank can basically do almost anything it wants, even if you're now able to quickly write a check for the late payments that are owed. Conversely, if the bank plans to reduce or freeze your credit line because home values have dropped, you can appeal by providing information that shows your house hasn't been affected by the decline.