Debt Free

You may think winter's almost over, but if you have a home equity line of credit, there could still be freezing in your future. That's because many people are being hit with frozen HELOCs as lenders look to mitigate risks and retrench their finances after being hit with defaults and foreclosures in their mortgage divisions. In many cases this has little or nothing to do with any change in the borrowers credit rating or action on their part. The bank or lender will simply look at the average real estate values in the area where you live and if the average values are dropping they'll conclude your home equity is reduced. This may be enough for them to freeze your HELOC.

In most cases they will cut off access to your credit line with no warning. You'll continue to write checks against your credit line as you always have, but all of a sudden the checks will be returned, unpaid. In some cases, banks will send out letters to inform credit line holders that their line has been terminated or suspended. Countrywide Home Loans has reportedly sent out about 125,000 notices to borrowers indicating their home equity lines were being frozen. Other banks freezing home equity credit lines include Indy Mac, Chase and WaMu, but not as many as Countrywide so far.

Many people assume that if their home values decrease, their equity will drop and their line of credit limit may be reduced accordingly, but that's not what most lenders have been doing so far. For most people with HELOCs, banks are just freezing or terminating them completely. People who live in areas with rapidly declining real estate values such as Florida, southern California and Nevada are more likely to get letters of death about their HELOCs, although King5 news in Seattle, an area with relatively strong home values, is reporting this phenomenon as well.

What can you do if this happens to you, or to determine if you're at risk of having your credit line frozen? The first thing you can do is to call your lender. They may just reverse the freeze by you asking them to do so. In most cases, however you'll have to get an appraisal to determine weather the value of you home has indeed declined. (Be aware that home appraisals are not free) If if the value hasn't declined or if it has only gone down slightly, you may be able to get them to reinstate your credit line.

People with homes whose loan to value is above 90% are in more danger of having their line frozen. At such LTV numbers it only takes a relatively small drop in home values to erase all the home owner's equity. It obviously scares lenders that the security on the credit line could disappear, hence their propensity to freeze the borrower's credit. If you have 50% equity in your home, you're much less likely to be in this predicament.