The Money Merge Account: HELOC's Freeze

Recently a lot of homeowners have experienced a freeze on their home equity lines of credit or HELOC's. This is mostly a result of two things.....1) the property values declining in and around the southland; 2) the banks LTV/CLTV position..."loan to value, combined loan to value." This number is calculated by adding all liens on any home and dividing that sum into the market value. The % is used by every bank in its risk accessment of any given borrower.

The concern from the banks point of view is that when a homes value declines, certain factors that went into account when the bank lended the money in the first place changes and the bank takes on more risk. Next, banks view HELOCs as more of a consumer credit type of debt, rather than a real mortgage loan, so the reserve the right to cancel or freeze lines at their own descression. Here's an example of a line to say 85% of a homes value at initially. Say the value on that home is 600,000 and the first mortgage is at the conforming limit, 417,000. This would mean the bank approved to extend 93,000 on a HELOC to this client at 85% combined loan to value, based on a 600,000 solid value.

Well the problem is that typically, market values go up....not down....and from time to time, in a declining market, where the value on that property declines under the 600,000 mark to say 550,000, due to foreclosures and defaults, then the banks risk now sits at nearly 93%....at a level the bank would not have lent on initially.

Taking things a step further.....say that line only held a balance of 50,000....well the bank would then elect to freeze the HELOC from further withdrawls which prevents the client from worsening the banks percieved risk. Technically in this scenario, the freezing of the HELOC left the bank with a 50,000 balance against a 550,000 valued home with a conforming first at 417,000......this gives the bank a risk level of say 85%, the criteria that they originally lent to the borrower on.

This is an example of most banks are doing to lessen their risk and stave off defaults.

Banks like Countrywide, who have all but done away with second trust deeds and HELOCs, as a result of more than high defaults......but some banks are still staying in the game. Chase Home Equity is still offering HELOCs at lower LTV/CLTV ratios and with stricter guidelines. Your local banks are also still financing HELOCs as well. The choices are there. Seek counciling from your trusted mortgage consultant and planner and alway monitor your own property values. www.zillow.com is a great site to monitor your homes market value.

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