It’s one definition of a bad mail day: Some Charlottesville homeowners have received letters from their mortgage companies informing them their home equity lines of credit have been “suspended” due to a “significant decline” in the value of their homes.
If it’s happened to you, don’t panic. The Man is not going to come and repossess your house just yet. But it does help to know what the issues are.
First of all, what is a home equity line of credit? A HELOC (as it’s known in the business) is a loan issued by the mortgage
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company, backed by your equity—which is the home’s current market value minus the outstanding loan balance. So if your home is valued at $250,000 and you owe $180,000 on it, the equity is $70,000. These revolving lines of credit were popular during the housing boom of the early part of the decade, when a homeowner could tap into equity to finance a bathroom or kitchen renovation, or pay for college tuition.
But now that the housing market has imploded, and home values nationwide have fallen—in some cases below the amount of the outstanding loan balance—lenders have tried to restrict HELOCs amid rising defaults.
“Lenders are nervous,” says Jason Crigler, certified residential mortgage specialist at Crown Mortgage Services. “They don’t want to extend credit to homeowners who suddenly owe more on their homes than they’re worth.”
But lenders have recently come under fire by the Office of Thrift Supervision (OTS), a federal agency charged with regulating savings and loans institutions, for sending out blanket HELOC suspension letters across broad geographic regions without assessing each home loan individually—which is a big no-no, according to the agency. Amid a tide of consumer complaints, the OTS issued a report to lending institutions reminding them of their obligations on these types of loans; namely, they can’t refuse to extend or change the terms of such loans to existing customers who make their payments on time.
Crigler admits that while Charlottesville home prices have indeed flatlined and are dropping, they haven’t decreased so precipitously like those in once-superheated markets like Florida, California or Arizona.
In other words, if you’ve received such a letter it may be a false alarm—or more a reflection of lenders trying to cut their losses than of you as an irresponsible homeowner.
Either way, “call your lender and talk it over,” says Crigler. “Bring up the fact they’re not allowed to suspend HELOCs arbitrarily or you’ll file a complaint with the OTS.” (The OTS consumer hotline, by the way, is 800-842-6929.) Make sure you keep making mortgage payments on time since banks are looking for any excuse to limit overleveraged homeowners’ access to credit.
If your HELOC has been suspended in the midst of tapping it to pay for a project, ask your lender for a specific reason why. “They may be willing to work something out with the borrower,” says Crigler. “They don’t want to lose your business.” And don’t feel tied to one lender. “If you don’t get anywhere with them,” Crigler says, “call up a local bank or credit union and see what they have to offer.”
