The Home Equity Line Freeze - What Can You Do?

You thought that your home equity line of credit was going to be there for you in case of an emergency, didn’t you?

For many home owners this spring has arrived with a surprise letter in the mail.  “Dear borrower, we decided to freeze your home equity line”. Major lenders have sent these type of letters out to tens of thousands of customers.  In some cases there are blanket freezes going on for certain parts of the country.

Given the drop in home prices and the tightening credit crunch many lenders have been reviewing their portfolios (read: your home loan).  And when they run automated home valuations they see that they’re on the hook for potential losses.
Can they really do this?

Yes they can.  In all equity lines agreements there is a standard clause that gives the lender to cancel or freeze the line in case of a drastic reduction of home value.  Since the line is also the 2nd lien on your house the lender usually doesn’t get much if the house goes to foreclosure.

So what is there to do?  If you think that the Automated Valuation that the lender used could be really wrong and your house hasn’t declined that much you can pay for an appraisal and send it in as proof.  This doesn’t guarantee that they will unfreeze it but it can be worth a shot if you like your current line and the terms.  Keep in mind an appraisal is around $300 though.

Usually the best option is to shop around for a new lender.  Keep in mind though that the lending criteria has tightened quite a bit.  Many major lenders don’t write home equity with a total loan-t0-value ratio of either 80 or 85% of the home’s value.  Basically 80-85% is the new 90-95% who used to be the criteria a year or two ago.

Your best bet?  Not the big nationals right now.  It’s going to be your local small bank or credit union.  Some credit unions are still writing home equity lines up to 95% of the home value (minus balance of the first mortgage).