Lenders are freezng home-equity accounts

In a bid to curtail further loses, many of the lenders such as Countrywide, Wells Fargo, Chase, and Bank of America are freezing second mortgages that are home-equity line-of-credit accounts (HELOC). They have sent notices to their borrowers stating the account is frozen and no additional money can be withdrawn. It appears this will be an on going event until every loan file is reviewed. They will be analyzing the borrower’s payment history, debt factors, and the value of homes in the immediate vicinity of the property. If they find that the borrower’s credit scores have dropped, slow or late payments, or increasing debt, the HELOC account could be frozen. This is also the case if the value of the properties in the area are showing a decline and pushing the loan-to-value (LTV) above the lender’s allowable percentage.
The majority of the HELOC loans were approved during a time when second mortgages were granted up to 95% of the home’s value. Today, most lenders will only allow a maximum of 85% LTV, and if the area is considered a severely declining market, the LTV could be set as low as 65%.
As the value of homes decline and foreclosures increase, lenders holding second mortgages are experiencing an increase in losses. Many times after a foreclosed home is sold or auctioned off, there is barely enough money to pay off the first mortgage, let alone the outstanding balance on the second mortgage.
This freeze will have a negative effect for many borrowers who were planning to withdraw from their HELOC to complete a home improvement project or pay for a child’s college tuition. There are also those who opened their HELOC account to use as a cushion in case of major set backs such as losing their job or a long term illness.
Until the housing market heals from this latest slump, HELOC accounts will be more difficult to obtain, even for the A+ borrower. So, if you are hoping to keep your home-equity account open, watch your credit closely and keep an eye on the value of homes in your neighborhood. One web site to check for home values is Zillow.com. Another source for this information is to contact a real estate agent who is familiar with the value of homes in your area. The LTV is calculated by dividing the outstanding loan balance(s) by the value of your home.
If your are planning to take a withdrawal in the future, it may be to your advantage to take the money out now and place it in an interest bearing savings account until you need it.

Denise Wing, C.E.O.
Certified Mortgage Lender
Academy National Mortgage Corporation
303-987-0622
dwing@academynational.net