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.

Also in this story lenders indicated they were walking away from equity loans rather than foreclosing on homes. That's because as home values fall, there's nothing left for the lender in second position. The lender who holds the first mortgage is paid first. Only when (and if) there is anything leftover does the lender holding the equity line or second mortgage gets paid.

Rather than continue to use your house as a piggy bank, stop moving unsecured credit card debt into secured equity lines and find ways to either earn more money or spend less. We are heading into a recession and things will only get worse.

Lita Epstein has written 20 books including the "Complete Idiot's Guide to Improving Your Credit Score," which includes strategies for budgeting and paying down debt.

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