Home equity lines of credit NOW DUE!

Posted May 28th 2008 3:00PM by Sheldon Liber
Filed under: Personal finance, Wells Fargo (WFC), Housing

The banks are starting to call in their markers. Home equity lines of credit, also known as HELOCs, were all the rage over the past few years and became very common among homeowners wanting to free up some equity. Perhaps it was for a room addition or college tuition. Maybe it was a 30 foot sail boat or just consolidating credit card bills at the lower interest rates. For me, it was used to create an opportunity fund for real estate investments.

Whatever your deal was, the HELOC landscape is changing rapidly. According to one of my lenders, Wells Fargo Bank (NYSE: WFC), the retail banking industry is looking for safety and liquidity -- and to improve theirs, they may be reducing yours. I have heard the same thing from mortgage brokers and private equity sources.

Lenders have been getting nervous as they watch home values move lower. They were writing equity lines at 80% loan-to-value. To maintain a margin of safety, they are reducing their exposure by calling due any unused portion of the available line. This means that if you had only used $100,000 of your $150,000 equity line you may receive notice in the mail that they are reducing the line to $100,000 and your available cash is zero.

In some cases where the loan-to-value has plummeted, you may even be asked to pay back some of the outstanding balance to align with the banks current loan standards. All this can happen even if your loan has always been current and your credit rating is strong.

There is another reason the banks are calling in the loans and reducing leverage. According to one of my lenders, the banks have to reserve capital to meet their equity line obligations. By reducing the HELOC amounts, they can free up capital for other purposes. In today's very tight credit markets, where bank margins (or spreads) are increasing, they have a lot of incentive to do this.

Like most things, people can readily adapt to the new lending environment if they have reasonable notice. What seems to be getting some borrowers steamed is that the HELOC notices are being sent out with little warning -- so I am warning you now.

Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm. He writes the columns Chasing Value and Serious Money.