I started a major home renovation project in Feb., and have been getting most of my great information from this site. I just felt like I had to share what happened to me this week, so that it might help someone else in my same situation.

We are very fiscally responsible people, and other than our mortgage we do not borrow money. After weighing all of our options, we decided to do a major renovation on our existing home rather than to move, and we plan to stay in our home for at least 10 years. After careful consideration, we decided to tap our Home Equity Line of Credit, which we have had on our home for over 5 years in order to pay for the project. We used it before on another project and paid it off two years ago with no issues.

We are now about 40% through our project, everything going fine. However, yesterday we got a letter from our bank telling us that they had FROZEN our home equity loan until we prove the current home value. This is not based on any specific information that homes in our area have decreased in price (they have not), but they "might" have so we have to get a new appraisal.

The issue is that we are in a catch 22- I have no doubt that when completed, our home will appraise high enough to qualify for the line of credit we have with them. The issue is that we are mid-project, and half of our home is down to the studs! That includes the kitchen and family room and bathrooms. We have the appraiser coming out tomorrow to see if he can still try to do a decent appraisal in it's current condition. In the meantime we have bills coming in from our contractor and we have to figure out a way to pay them.

If any of you are using your Home Equity Line of Credit to fund your project, please consider withdrawing the entire amount that you need for your project and putting into a savings account. That way you know it will be there- from what I understand all banks are doing this to protect themselves from bad loans, and they do not care if you have great credit and have been a good customer.

I have done some research online and now I see that some financial people have been warning about this for a few months, but I was not aware of how bad it had gotten. I had to learn the hard way :).

The appraiser will use your plans & specs to complete his/her appraisal. Expect & plan for the worst & hope for the best.

If you Google Fannie Mae or Freddie Mac Declining Markets you'll get lots of hits.

/tricia

I think that we will be OK on the appraisal, but we have to submit it, and wait for 30 days to even find out if they agree or not. We are supposed to be finished in 45 days, so it is really cutting it close to either find other financing, or figure out something else.

Though I think that there's less possibility that they'd freeze an account.

This might work better ... have some stock or mutual fund certificates to give them as collateral for the loan.

As they normally loan up to 50% of the current value, it might be safer to give them $150,000. worth if you need a loan for $50,000.

But you wouldn't need that much, if you used the home as well.

I'd want to have talk with the bank before taking the loan, as to what they might do regarding freezing it, part way through. That said ... the "freezer" requirement may well have been a surprise to the local bank officials, as well.

It might be useful to ask whether there'd be a different interest rate if the loan were partly backed by stocks or mutual fund certificates. Much less hassle to liquidate, in case of need: one phone call to their usual broker. (In case their client became "broker"'n usual).

Good wishes for making your assets work most effectively for you.

ole joyful

However, I worry about people who may be mid project who were 100% counting on their HELOC to finish. As it it will take at least 30-45 days to resolve this, some people may really panic to figure out how to finish their projects, especially if they were very large.

We got our letter on April 14th, but the letter stated that the account was frozen on April 8th! I am thankful that I don't write checks on the account, but would transfer the funds to my checking account first or I would have definitely bounced checks. It's ruthless- some warning would have been nice.

If you have a Credit Union, I would check and see if they can do anything for you. Mine has been more then gracious about taking on the loan. It is a point lower then the current loan, lower payment, and 5 years off the term of the current loan. The only thing it costs me out of pocket is a $275.00 apprasial fee. Of course, she did say they are getting A LOT of phone calls from Fifth Third customers.

I like that ball game better.

But I own shares in a bank.

That has been rather heavily involved with those funny bunny mortgages south of the 49th, that folks had the rating agencies give a clean bill of health, some time ago.

They've cost me several thousand dollars over the last few months ... not actually "cost", as I didn't sell them. But it'll take quite a while to recover.

I've had a fully-secured Line of Credit for ten years or more, backed by stock and mutual fund certificates, that lies there unused most of the time.

There were no set-up fees, and there are no maintenance fees to keep it in place, unused.

I inquired a while ago how much the rate would be were I to draw on it (to buy some stocks ... which makes the interest deductible) and they said 5.25%.

Good wishes for making your income and assets work harder for you than for the other guys ... there's almost always advantage to learning how money works and managing your own.

ole joyful

Loan to Value ratios are lower, credit score requirements are higher, & rates are higher in Declining Markets.

So, if your home equity loan puts you over the agencies' top allowed LTV for your particular Declining Market...the bank's going to restrict how much of the line is accessible.

Using stocks as collateral will not make a difference to most lenders. They package these loans by the hundreds & sell them off in groups (traunches) to Fannie Mae & Freddie Mac. Each individual loan must meet those agencies' LTV guidelines.

You may find some smaller lender willing to keep your loan in their portfolio & yes, that's more likely with a credit union...but even if a lender originally intends to keep a loan they still underwrite to agency standards in case they want to sell it at some future time.

Lower LTVs, higher credit scores, & tougher underwriting in general are here to stay for the immediately future...probably a long ways into the future.

If you live in a designated Declining Market area there is no more 100% financing.

/tricia

The OP's one little appraisal does not a Declining Market make...nor refute. It's just one more appraisal for the data bank.

/tricia

I'm not of a mind to be selling my stocks at this time.

I've bought some more, three times since before Christmas, and am overdue for a fourth, and have a few more opportunities lined up, just in case. Including using my Line of Credit to do it.

But I'm not selling.

As one mutual fund manager told us mutual funds' sales people over 25 years ago, when I sold them, for a short while, "I like to buy a Dollar ...

... for 60 cents!".

And, as I'm closing in on 80 ... you'd think that I'd have more cents, wouldn't you?

Good wishes for continuing to learn not only how money works ... but how life in general does, as well.

And where we fit into it, on a world-wide basis.

We don't live in our own little back-yard, any more.

ole joyful

That was the only reason given. We are carrying a pretty small balance, we have always paid on time, are paying down the principal, etc.

They did say that if any customers already had a contract for a major home improvement project they would work with them. They also said that if we can prove that property value has sufficiently increased they would open the line again.

We were not planning on using this again unless there was an emergency. I hope we don't have one!

stellar1:

"I could max out the line and still be well below what my home is appraised at with the county."

What your home is appraised at with the county is probably not relevant. Municipal tax assessments are, in the vast majority of jurisdictions, not representative of fair market value. Assessments are performed on some routine time frame...every 10 years, every 6 years, every 4 years, & a very few reappraise annually (expensive so most munincipalities don't do it frequently). So, depending on which direction the market is moving & when your last assessment was performed there can, and usually is, a large difference. Then, to further complicate the issue...the majority of jurisdictions do not tax on the full market value. The assessed value is usually some percentage of FMV. For example, here in CT it's 70% of FMV. Also, if you read your HELOC documents I'm certain you'll see that your lender has retained the right to pull the line of credit whenever there's a material change & a decrease in the value of the underlying collateral meets the definition of "material change". It's highly unlikely your lender has done anything illegal. Of course you have to pay for the appraisal. It's your loan & your property. I'm glad you got a another loan that meets your needs. Somewhere in the fees and/or rates you are paying for an appraisal for your credit union's use also.

Again, it's not the lenders who are driving these HELCO pullbacks. It's the agencies' underwriting. But, the lender is in full agreement because they don't want to have a 110% LTV on a property located in a declining market.

/tricia

I'm kind of ticked off that we have to continue to pay the yearly fee to keep the line open when we can't use it.

What happened to us, actually, is that when we refinanced last year, we decided to pay extra to keep the line open rather than pay it off as part of the new mortgage. When we did that, the new higher value of the house was put into the loan agreement for the HELOC. It was a detail I just forgot about -- it was not something we asked them to do, because we certainly weren't planning to cash in on that much equity. If they had kept it at the old value, we wouldn't be having this problem now.

We have gotten a new appraisal, which came back good. I have sent it to the bank and we will see what happens next.

Should ninety-seven percent of readers not be in such position ... no problem: time to read is at (next to) no cost.

ole joyful

This does not mean, however, that lenders will not pull in HELOCs. Many (if not most) lenders are busy reviewing their entire HELOC portfolios. They are looking for declines in collateral value and/or in the credit quality of the borrower.

But, there is NO more Freddie/Fannie designated "Declining Market" adjustment to loan products. Prior to June 1, those areas had a 5% reduction in allowed LTV.

/tricia

The line of thought advocated could cause more people to lose their homes making the root cause for these problems stronger.