The Shrinking HELOC


All serious real estate investors understand the importance of having a hefty HELOC in their back pocket. At least I think they do or I wouldn’t make that kind of bold statement.

I am in no way intimating having or using a HELOC is the only way to buy property. I’m simply saying it is a very comfortable feeling to have a six figure backdrop you can rely on when that oh so nice property becomes visible on the real estate radar screen.

Unfortunately for me, my hefty HELOC has been reduced to a mere shadow of its former self. It seems my bank decided the value of my home has decreased to the point the equity could no longer support the numbers.

They unilaterally cut it by two-thirds and unfortunately for me, there isn’t a darned thing I can do about it. It seems the original contract gives all the control to the bank and one of those controls is the ability to lower it when they so decide.

I received their letter in the mail earlier this week and its tone was very polite but very harsh. I think you know what I mean without me saying another word.

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A Life Raft Full of Passengers…

I would also say I’m not the only one in this boat. You may have had your home equity line of credit downgraded by two-thirds or more as well. The resulting sinking feeling just adds to the frustration, right?

It isn’t the end of the world that is for sure. It only looks like it. Here’s why.

One of the “FAQs” on page 2 of their letter says:

Q. How did you determine the value for my home?
A. We used an automated valuation method commonly used to evaluate the worth of real property. It uses both historical data and projected property values. We believe the valuation of your property is accurate.

On the surface, the answer appears to be vague gibberish. However, I believe their answer is really saying, we think your property is going to continue to slide in value so we limited our risk exposure by downgrading your limit. Taking my thinking one step further, their Q&A is telling me that the so called real estate recovery is farther out then any of us may have imagined/guessed.

I don’t know that for sure. I’m simply reading between the lines of their 2 page letter. I also am factoring in the absolute truth of their ranking in the industry. They always receive the highest marks from their policy holders and investment analysts.

When I encounter a person insured with this company, I never try to move them into another company. They are that good.

Again, I don’t believe I am the only one in this boat. For all I know everyone with a HELOC received the same type of letter from their bank.

By the way, they never bothered to inquire about the balance on my first loan. That also tells me their real message is the market has some stumble still left in it.

Insurance companies shouldn’t be the risk takers in the market…

I won’t fault the bank for lowering my HELOC because they are a subsidiary of the insurance company that insures my cars and my home. I want them to be as solvent as possible with as little risk exposure as possible.

As some of you know, I co-own an insurance agency with my son and AIG is one of the companies we have in our stable. Fortunately for us we only have the life side of their operation.

I say fortunately because if what I’ve read about their risk/leverage exposure is true, they were the highest in the industry. While every other insurance company had a 4 to 1 or 2 to 1 exposure or thereabouts, AIG had an 11 to 1 exposure. This information is directly from The Motley Fool weekly newsletter. The Fool usually doesn’t print bad info so I have to believe their analysis.

I would ask that you please don’t take any of my babblings as me being a cheerleader for the insurance industry as a whole. I see first hand some of the nonsense they can pull on customers so I would never be the insurance industry chamber of commerce (so to speak).

What I am saying is I applaud those companies that actually run a tight a ship as possible in this tumultuous environment. Let’s face facts. All of us have insurance on our cars, homes and investment properties. We want to feel secure that they will actually perform, read pay their claims, should we get hit by an Ike or a Gustav type of event.

Regardless of what kind of financial institution gave you your HELOC be prepared to see it shrink if it hasn’t already. And, if you are like me, and have a HELOC from a bank that is a subsidiary of an insurance company, you may have just been told you have a good insurance company regardless of what I believe is the “hidden” message.

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  1. Welcome to the club. WAMU cut my HELOC by $100k earlier this year. I know of a couple of investors who lost out on deals because the HELOCs were cut as the deal was in progress, when they were ready to close there were no funds.

  2. Went through this with my bank last week and they offered me 9.04% HELOC! Most of the fees were rolled in, but still at that price I’d be better refinancing my home. One bank said they couldn’t lend more than 85% of the current homes value, another said 70%. I can’t blame them, but if the market doesn’t correct, we will see some serious stagnation in the real estate investing.

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