Belt-tightening time: Lenders start freezing access to equity lines

In a Wall Street Journal (subscription required) story yesterday, it was reported that lenders are starting to audit equity lines of credit. If they see that a person is behind on their credit card payments or that their home value has dropped, the lender may freeze access to an equity line or lower the amount of available credit.

This is legal and found in most equity line agreements. If your home has lost value or you are behind on paying any bills, you may get a notice from your equity line lender freezing access to additional credit or lowering approved credit limits. According to the Journal, Washington Mutual said it's already started sending out such notices. Citigroup indicated it has the right to do so in its loan agreements, as did Countrywide. Others also will likely follow suit.

If you are having trouble paying your bills, finding your equity line frozen could be a painful pill to swallow, but it could actually help to save your home. While credit cards are unsecured credit, which means a creditor can't foreclose on your property, equity lines are secured credit. Equity line creditors do have the right to foreclose. If you can't pay credit card bills now, it's only a matter of time before you won't be able to pay your equity line or mortgage.