Worse than this is the fact that some lines of credit were completely frozen (click on the document to view larger text).
You are probably asking, how can they do that? Believe it or not, it is in the fine print. My own HELOC agreement states the following (click on the document to view larger text):
The only lines that were reduced or frozen were lines of credit that had an available balance. Lenders wanted to reduce or eliminate homeowners’ access to their equity through their existing equity lines.
Homeowners who had maxed out their HELOCs were not affected by this. Whether they used the HELOC to pay off debt, pay for a remodel project or simply extracted the wealth to protect it and keep it safe and liquid, their lines were left intact because there was nothing to freeze.
Homeowners who had been relying on their HELOCs no longer have access to them. I’ve heard stories of homeowners who were in the middle of a home improvement project and were unable to pay their contractors because they were using their equity line to fund the project. People who were using their equity line as an emergency reserve or fallback plan in the event of a job loss or sudden financial hardship were also adversely affected.
For some of the lenders there is a dispute process but essentially that consists of you paying for a new appraisal ordered through an appraiser that the lender chooses. If the value is determined to have dropped in accordance with the lenders assessment then you are simply out the money. If, however, the appraisal does show the value is higher than what the lender determined it was they still reserve the right to refuse to restore the line of credit to its original amount, which doesn't sound like much of a dispute process, and you are still out the money for the appraisal.
If you are one of the fortunate few that have a HELOC that has not been reduced or frozen you may not want to take a chance that the lender won’t suddenly decide to follow the other lenders that have done just that and send you a letter. I can assure you that it is not typically the kind of news received with a smile. My advice is to look closely at your financial situation and decide whether or not it makes sense for you to borrow the max available to you and put it in a savings account just in case. Yes, I am aware that it comes with a monthly payment but as your equity continues to lose its value wouldn’t it be better to preserve and protect what you have left of it before you end up needing it? Besides, with the Fed lowering rates as they have and will likely continue doing, HELOCs are one of the few instruments positively impacted with a corresponding drop in rate and payment.
In times of uncertainty, one thing is certain. Cash is King!!!
Ric Edelman, author of The Truth About Money says, “A proper financial plan plans for the worst and hopes for the best.” The saying “it’s better to have money and not need it than to need money and not be able to get to it” has never rang so true.
House rich and cash poor is not an option in these changing and trying times. Life happens and you need to be prepared.
The only way to protect your equity and keep it safe is to keep it separated, liquid and accessible. I will talk about profitable equity management in a future article.
