HELOC Frozen? Here's How to Take Action
During this recession lenders are cutting the umbilical cord to the funds as homeowners with a HELOC have a high likelihood of being severely delinquent on their mortgage payments, according to a November 2010 study by TransUnion, a credit management information company.
The study indicated that under certain circumstances during trying economic times the presence of a home equity line of credit or a traditional home equity loan may contribute to consumers "rolling" their delinquency status on mortgage payments from 30 to 60 days delinquent to 60 to 90 days past due.
In March 2006, the national 30-60 mortgage roll rate was 12.56 percent for borrowers with home equity loans/lines and 17.16 percent for those without. However, by March 2009 the 30-60 roll rate had skyrocketed to 26.55 percent for borrowers with home equity loans/lines, while increasing to only 22.66 percent for those borrowers without.
So it's no wonder that now that home values have drastically fallen, lenders are starting to freeze or reduce the HELOC to prevent homeowners from owing much more than their homes are worth, or to stop delinquencies sometimes before they even start.
AOL Real Estate addresses below what you should do if your HELOC is frozen or reduced.
"The presence of a home equity line used to be an indicator that a consumer had 'deeper pockets,' i.e. more equity and greater financial resources. Now it has become a red flag for higher risk due to over-leveraging," said FJ Guarrera, vice president in TransUnion's financial services business unit and one of the authors of the study.
To calculate the amount of a line of credit, lenders base it on a percentage of a home's appraised value and hold that amount on reserve for homeowners to use to meet their needs. The homeowner would simply write checks against the line to withdraw the funds. Some homeowners use it for home remodeling, to pay off credit cards or otherwise consolidate debt. (Whether or not trading unsecured debt for secured debt is a good idea is an issue to be discussed separately.)
Reasons for Change
A lender can reduce or take away the line of credit if it has legitimate knowledge that a "signficant decline" in your home's value has occurred, or if it "reasonably believes that the consumer will be unable to fulfill the repayment obligations under the plan because of a material change in the consumer's financial circumstances." To boot, even if you're current on your payments, your line can still be frozen.
Written Notice After Change
Don't expect any advance notice (other than this economy), as lenders don't have to announce the reduction until after they made it. After all, what homeowner wouldn't rush out and cash a check if they knew in advance the funds would be cut next week?
However, by federal law, a HELOC lender must send you written notice no later than three business days after the freeze or reduction. Information about other changes to your HELOC must also be included. Some homeowners have been caught off guard with a bounced check simply because they didn't open their mail and read the letter.
If you're caught off guard mid-project on your kitchen remodel or other need, then what?
Call Your Lender
Although the notice you receive will likely contain reasons they reduced yours HELOC, such as due to a decline in the value of your home or a negative change in your financial situation or credit score, you can contact the lender to see if you can take any steps to reinstate your HELOC. For example, perhaps you can prove a mistake on your credit report, or inform them that you just took on a new higher paying job.
Ask for Reinstatement
If the conditions under which your lender froze or reduced your HELOC no longer exist, your lender can reinstate or raise your credit privileges. It is a good idea to make this request for reinstatement in writing for your records. Once your lender receives your written request, should promptly investigate and determine whether your HELOC can be reinstated.
Cough Up for Fees
When a bank considers your request for reinstatement, you may have to pay a fee to cover the costs for an appraisal or credit report so it can investigate. However, your lender cannot charge you a fee for simple reinstatement if the reason for the freeze or reduction no longer exists.
Contact Other Lenders
Another lender just might see things differently, or at least could be a good negotiating tool. Let lenders know you are shopping around for a HELOC and they just might cut you a deal to keep you or get you as a client.