HELOC Suspension Shock

Several banks, reluctant to lend because of recent losses, now want ironclad reassurance that they'll be repaid. Many are suspending certain kinds of loans, including popular home equity lines of credit (HELOCs). If they do extend lines of credit, they're demanding higher ratios of underlying collateral, steeper fees and interest rates, and much more proof of credit and income.

While Americans walk to the mailbox each day in anticipation of a highly anticipated economic stimulus check from the IRS, many are walking back home in HELOC shock. Banks all over the country are sending out notices to customers informing them that their valuable lines of credit have either been shrunken or altogether revoked. For those who have been relying on home equity lines of credit as a financial lifeline, the news is devastating. But industry leaders warn us that the new trend is going to likely momentum over the coming weeks and months.

Vanishing HELOC

Banks are suffering from the whiplash effect of lending too much money to too many unqualified borrowers. They're also hurting from a severe drop in value of home prices, because those homes represent the collateral that secures home equity loans. In the same way that the value of one's stock investment portfolio plummets when the stocks that make up that basket of assets lose value, banks who own a stake in their customers' real estate holdings see their own security diminished when home equity drops. Home equity lines of credit are directly tied to real estate prices, so they're vanishing at an alarming pace as banks drop them from their menus of products and services.

Those who continue to offer HELOCs are updating their limits to reflect the worsening housing market conditions. That means that many homeowners have lost their borrowing power at a time when they need it the most. Lenders, including industry giants like Citibank and Washington Mutual, are using tighter guidelines to reevaluate the credit and payment history of individual borrowers based on tighter guidelines. If you fail to meet the stricter standards, you may lose your HELOC.

No recourse

Consumers adversely affected by the pinch have little recourse. Even if you appeal HELOC suspensions or limits by paying for a lender-approved home appraisal to support your argument that your house is worth more, the bank may disagree based on a different valuation. Lots of lenders are using generic software-based appraisals, known as AVM models, to justify their numbers. Although the accuracy and relevance of the AVM methods is questionable because many are based on outdated data, it essentially remains the lender's legal prerogative to draw its own conclusions.

If you have access to a line of credit, you may want to quickly tap into it while you still can. Withdraw the maximum amount of money before the lender curtails or suspends the HELOC. Once the funds are yours, nobody can stop you from spending them.