Countrywide and other financial institutions are notifying thousands of homeowners that their credit is shrinking as home prices sag. Some are revoking the entire line of credit, with little or no advance warning.

If you have an active line of credit, be forewarned. You may have the rug yanked out from under you, and be in for a tumble. Tens of thousands of homeowners with home equity lines of credit (HELOCs) are starting to feel the impact of the mortgage meltdown. Like a grouchy bear unexpectedly awakened during winter hibernation, this development has reared its ugly head within the ailing real estate market.

Pulling the HELOC plug

Now, lenders are sending notices to scores of customers, informing them that they need to stop borrowing money against their HELOCs. Home prices have dipped so far down, the collateral that houses represent to lenders no longer exists. As a result, lines of credit have evaporated into thin air. But Americans have recently gotten into the habit of relying on their real estate as a cushion against any financial setback. As the economy has slowed, withdrawals against home equity have quickened.

Home equity not a personal ATM

Many economists and business journalists have been referring to houses as ATM machines; but now, the ATMs are getting unplugged. For many homeowners, the tightening of credit could not have come at a more challenging time. Tens of thousands are fighting off delinquency and foreclosure, thanks to vital cash flow from home equity loans and lines of credit. Their experience now is like getting stranded in a foreign country on a vacation with a cancelled credit card, and no cash to tide them over until they return.

In this case, the vacation started when real estate inflation creating an overabundance of overnight wealth-at least on paper. But now that the bubble has burst and the subprime mortgage sector has gone down in flames, paper millionaires have morphed into real life paupers. Just as unrealized gains in the stock market can be erased by a single day's drop, real estate wealth based on appraised market value can also get wiped out as a bubble bursts. Homeowners are left out in the cold with their credit frozen by overcautious lenders trying to rein in the imaginary riches.

Countrywide Financial sent about 120,000 letters to customers in January, letting them know that they can no longer borrow against their HELOCs. Similar actions have been taken by other lenders, including Texas-based USAA Federal Savings Bank. The cutbacks affect a variety of home equity loans or second mortgages, and also mean that some institutions may curtail or even suspend issuance of new lines of credit. Chase Home Lending, a subsidiary of gigantic JP Morgan Chase & Co., for instance, will soon impose new restrictions regarding which customers qualify for a line of credit. In some of its jurisdictions, Chase has already dropped the loan to value limits on equity loans by 5 percent from previous levels.

Published on January 21, 2009