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Home Equity Credit Lines Cut. How You Get Screwed Two Different Ways

by Charles Feldman on June 11, 2008 · 10 comments

  

Watch out. The home mortgage crisis may be about to belt you in the face and you may not even be aware the blow is coming.

A truly frightening article in the New York Times about the “shrinking lines of credit” and what it may mean for homeowners–and we are not talking about homeowners facing foreclosure,either.

What we are talking about are home equity lines of credit, often used to finance a whole range of things from vacations, to medical care, to new furnishings.

Simply put, such lines of credit are being abruptly taken away or greatly reduced, says the article.

Washington Mutual and others drop the ax

The troubled Washington Mutual, according to the article, has reduced or suspended “about $6 billion of available credit under existing home equity lines.” Other lenders are doing the same.

A main reason for having your credit line reduced or even suspended is a decrease in the value of your home.

“We will increase, decrease or suspend lines based on a number of factors, including a customer’s entire relationship with WaMu, their payment status and history, changes to their creditworthiness, and changes in the value of their property…We believe this is part of being a responsible lender,” says WaMu spokeswoman Sara Gaugl, as quoted by the Times.

A big problem is that most lending institutions apparently do not make public the guidlines they use to make their cutting decisions, so it may not be so easy to find out if you are about to have your own credit line severed.

The 20 percent solution?

According to the Times, as long as borrowers have in excess of 20 percent equity in their homes, they should qualify for credit. That benchmark sort of went away when real estate prices were skyrocketing, but now it is back in a big way!

And, there is one more thing to worry about—sorry.

According to the article, if you had, say, a $25,000 credit line, and you have already used $10,000 of it—-if the lender reduces your credit limit, credit reporting agencies are likely to lower your all important credit score making the argument that now you are over-stretched.

Heads you loose; tails you loose.

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{ 10 comments… read them below or add one }

Rehab702 June 11, 2008 at 7:46 am

My HELOC was cut by WAMU. They reduced it by $100k without warning. I noticed the cut when checking the account online and didn’t receive a letter notifying me of the change until about a week after it happened. There is more than enough equity in my home to justify the line, they just made the cut across the board. I was told that I could reapply but they are not making favorable decisions at this time. WAMU no longer wants to be in the HELOC business, it wasn’t long ago that they were spending huge sums of money to aggressively market in order to attract this business.

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BawldGuy Talking June 11, 2008 at 8:51 am

Super post on a real time topic.

At our firm we’ve advised several clients who knew they’d have a near future need for the cash, to max their credit lines. We’ve already heard from two of them who did it just days before others they knew told them of unannounced cuts.

Their money, and more importantly their nearly lost equity, are now safely in the bank.

Banks are once again showing how ‘friendly’ they really are. It’s not that they shouldn’t be cutting. It’s how they’ve chosen to execute the across the board cuts in the dead of night.

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Terry June 11, 2008 at 11:56 am

This is a shame. My business partners mom was just about to get a home equity loan to help consolidate her debt into one payment. I know she does not have 20% equity. Too bad.

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Terry Wygal June 11, 2008 at 11:59 am

Not only is my business partner’s mom screwed in regards to getting a HELOC but she is actually trying to sell her house as an alternative and the market in her area is terrible. I’m trying to convince her to keep it as a rental but I think she wants it off of her credit.

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Joshua Dorkin June 11, 2008 at 4:11 pm

Nice article, Charles. This is yet another Sign of the Times, but according to the Fed, things look like they are only getting better . . . YEAH RIGHT!

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Tracy Clardy June 12, 2008 at 8:41 am

We’ve had a HELOC sitting at Bank of America for $62K since last August. We now are in the middle of a major addition to our house and wrote a check for $25K to our contractor for half the amount due. The next day we got the letter saying our home has dropped in value (which our tax appraiser greatly disagrees) and cut our line to $24. BOA did pay the check but now we are moving the HELOC to a local bank where they are sure of our home value, in order to get the rest of our line back.

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Colin Stafford June 13, 2008 at 5:33 am

We’ve seen this phenomenon too, in the Central Florida areas we work in. It can be very different from one bank to another – we have seen one large bank that we’ve worked with for many years reduce or remove HELOCs as described in this story. We have also had other, much smaller banks (who were not as exposed to the lending extremes as the bigger guys) tell us that its business as usual for them, with no changes.

There is at least some hope out there!

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Mindie June 18, 2008 at 10:43 am

I don’t have a Home Line of credit thru WAMU, but I have a Business Line of Credit thru them. They did this to us. Without warning they pulled $40k from us. I had written out checks totalling almost $18k on a Wednesday, that Saturday I got a letter in the mail saying that they had reduced our line of credit to what we had already spent and would evaluate any outstanding checks written off the account. They DID NOT evaluate the checks, they stamped NSF and returned them to my vendors who now will not work with me. WAMU screwed us big time!

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I. Samuel Moth September 11, 2008 at 6:52 pm

You are not alone. American Express and other large banks are performing these acts on thousands if not millions of perfect payment consumers, and the scope covers all areas of credit from personal cards to HELOCS. The media, as driven and owned by the banks would have “us” believe that this act is a mandatory lifeboat response having to do with managing risk and loss precipitated by natural disaster credit-card reliance (since our government was out partying during these events and cutting birthday cake) and the mortgage fiasco which in fact was created by the banks themselves when they threw billions of dollars at unqualified consumers around 2001 with knowledge of their poor risk and just to make a buck. The truth is that the main banks, thanks to affiliations with the Federal Reserve, will always “win”. For the past 8 years of this crony administration the banks have not only made huge buckets of cash via the standard interest-rate way on cards but in addition, have been gloried by corporate tax breaks. Now the tide is turning and the current thieves will be driven from office in November via the peoples’ elections. Without the padding of corporate tax cuts many of the ‘medium’ banks are stressed and many are inventing new strategies of a final ‘cash-out’ before the next step is implemented in the New World Order when a global currency will eventually become the standard and the only ‘class’ will be high class with all others consigned to serfdom. How does this affect your standard consumer middle to upper class that historically pays their bills perfectly and is never late? Why they’re being squeezed out of the club, of course. Credit is not liquidity. Make no mistake. So with greed at the forefront, as always, driving the corporate bottom line, and especially with banks, they are sticking it to large group of long standing good faith customers without the slightest regard for damaging their credit. This becomes a temporary double-win for the banks as they incrementally raise interest rates to squeeze the last drop and chase the balance to unconscionably wreck the credit of good faith customers like yourself and drive you from the club. In order to understand why this happening, you should distance yourself from your personal picture and examine the larger picture objectively. The fact of the matter is that this is a planned operation by the main banks in conjunction with the Federal Reserve to gain substantial control over the populace, whittle down all but the highest class and proceed with the next step in the New World Order. What can you do in response? Well, you can quit spending on your cards and rip them up. Also, I know this sounds old-shoe to some, but when you put certain politicians in office, by virtue of commission (voting for them) or omission (not voting at all) and you go to sleep at the same time and delude yourself into thinking nothing will change, you’ll wake up with everything changed and you’ll pay for the party. Also it is important to realize that this effect of the undoing of America has not occurred overnight nor in a bubble but is a result of good people having done nothing over an extended period of time. Good people complaining yet doing nothing, not voting, living off credit, beyond their means and without proper judgment or foresight into the larger picture at hand. Quit living beyond your means if it involves using credit and savor the feeling. You can feed the negativity created by dwelling on their injustice or you can learn new ways of living to free yourself from the clutches of institutionalized banks. Or, you can calculate the damages the banks have in fact caused you by ruining your good credit and might be surprised to find that the amount of those damages just might equal the very amount you owe them. What a coincidence. Wash? Watch Aaron Russo’s movie: Freedom to Fascism.

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Hosed homeowner December 4, 2008 at 11:43 am

Wells froze my equity line without warning, lopping over 30k off my available credit. I didn’t get an online notice on the website. I am on hold at the momemnt.

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