Home equity lines of credit, or HELOCs, have begun to dry up across the U.S., leaving many homeowners strapped for cash. If you can find one, they're no longer as dependable as they once were, so borrowers should wean themselves from them as soon as possible.

Home equity has fallen precipitously within the past year and a half. As a result, banks have been curtailing, or even revoking, credit-often on short notice. Home equity can rise for two main reasons: If a homeowner pays down his mortgage balance, it will automatically generate a corresponding amount of equity. It can also grow-at least on paper-when housing prices go back up.

Home equity loans out of style

During the last bull run of real estate, the average price of a home rose nearly100 percent, and that created an enormous amount of instant equity. Lenders encouraged homeowners to take advantage of their new wealth by accessing it through home equity loans and lines of credit. Millions of consumers responded eagerly, spending money from their equity like it was going out of style.

What they didn't predict was that it actually would go out of style. As soon as prices crashed in the housing market, that's exactly what happened. Home equity loans went the way of platform shoes, hula hoops, vinyl records, bellbottom pants, and-if one dares to say it-prudent household budgetary responsibility. Now, lenders are giving borrowers a harsh reality check by reminding them, in no uncertain terms, that the home equity they used to enjoy no longer exists. It has evaporated, and so has the willingness of banks to extend credit on HELOCs.

Banks and HELOC loans

It's important to note that the Federal Deposit Insurance Corporation (FDIC) will not allow banks to revoke HELOC access arbitrarily. Instead, the lender must first document that a customer has gotten behind on his payments. In that situation, the bank can take immediate action to limit a borrower's credit.

If you stay current on your payments, the lender must show that there has been a significant decline in underlying property value. But that's pretty easy to demonstrate these days, because home prices across the country are falling through the floor.

Consumers do have the opportunity to protest decisions based on appraised value. But it's usually hard to prove your case, especially in this foreclosure-prone environment where nobody knows how far prices are going to drop before they hit bottom. Another reason that it's hard to win these arguments is that banks can legally rely on computer software programs to calculate their valuations, and the data in those programs-which is often outdated-can be interpreted rather loosely.

One proactive step that a homeowner can take is to ask that fees associated with the line of credit be refunded. Banks will often agree to give back HELOC application fees as a sign of goodwill. It may not be much consolation, but these days, every penny helps.

    Published on August 4, 2008