The agencies are driving this phenomenon. They have designated what they're calling "Declining Markets" & adjusting their lending criteria accordingly. Banks are following suit. Sounds like you're located in one of those markets. And, you're not the only one to receive a similar letter.

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

Thank you for your info- I googled a lot today and found that you are correct, it is happening everywhere. I have had my head so far down in the renovation world that I missed the signals and it caught me by surprise.

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.

I'm glad I'm reading this. I know that our area was recently designated a declining market (even though median family income is still quite high and climbing) and we're considering using our Home Equity line to fund a project to rebuild our 1918 brick front porch. If we need the HELOC, I'll definitely pull the full balance out up front.

Might be a good idea to store the proceeds of the loan in a different financial institution.

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

Thanks for the advice- I was thinking along the same lines of putting the money in another bank. We are lucky that we do have assets like stock to either sell or put up as collateral. In addition, I believe that we can get another loan based upon our house value, which has gone up in the last 5 years not down.

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.

It's not Fifth Third Bank is it? They did the exact same thing to me, even though I had NEVER drawn on the thing and was only paying down the balance. I got a nasty letter from them on March 22, 2008. They insinuated that I had bad credit and that my home was value had drastically declined. (I don't and it has not. I could max out the line and still be well below what my home is appraised at with the county.) They made me so angry that I turned them in to our State Attorney General's office because I have a feeling that they did this to everyone in our state. The bad thing was they closed the line on March 20. The letter was dated March 19 and we did not receive it until March 22. So if you were drawing on your line during those two days, your checks were bouncing. I am moving it to a second mortgage with our Credit Union. The rate is 6% for 15 years. With our current first mortgage, our house will be paid off in 16 years, just in time for the kids to start going to college. So sorry this happaned to you. They also stated in the letter that they are making people pay to have their property appraised to re-open the line. I would consider talking to a lawyer to find out your rights. I am considering doing the same as I feel they have breached their own contract. I have a feeling they will have multiple lawsuits are a class action against them soon.

Steller1- No, my bank was ETRADE. I think all banks are doing the same thing, and it does not matter where you home is or what your credit rating is currently.

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.

Interesting, thanks for replying back. Banks are getting nervous, I don't take this as a good sign for the economy.

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.

A credit union is a financial agency that's owned entirely by the folks who use it ... not stockholders.

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

It doesn't matter who the financial institution is...the Declining Market is driven by Fannie Mae & Freddie Mac. So, if a bank wants to sell to these agencies (and they all do) they have to follow underwriting requirements specified by those agencies.

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

So how do you tell if you are in a designated Declining Market? Our area was never over inflated to being with, property values always held pretty steady with very modest gains.

stellar1- I think that these days you are "guilty" until proven innocent. In other words, you have to prove you are not in a declining market by getting a new appraisel.

Well I am scheduling one now through our credit union. I'll let you know how it comes out.

Nope, the agencies decide who's in a Declining Market and who's not. It's purely statistical. Every time Fannie or Freddie receives an appraisal...into their data bank it goes. They have so many loans that their data bank is very extensive. So, based purely on stastical analysis of the combined appraisals for a specific area they will make the determination whether an area is declining, or not.

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 have just applied for HELOC, was told i would know by Wednesday. Asked for $100,000 and was told that it should not be a problem. We have a six month savings safety net, and a second house (being rented at present) if things ever get really bad but thought a HELOC would just be another safety net. After reading these posts, i'm not so sure. I had thought that by doing this if ever our jobs disappear we would be fine for a good long time.

Hi again jen ...who's 42 ... but feeling the past few days like 68,

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

We just got this notice, too! The mortgage company is suspending our line of credit because the value of our house has declined by about $45k since last year.

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!

It'll take a bit of time for all institutions to get around to getting these letters out to everybody with a HELOC. But, sooner or later, everybody's going to get one if they're in a Designated Declining Market.

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 don't really understand why they don't just decrease the line of credit by the amount the house dropped in value if the homeowner has good credit.

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.

Whatever the reasons for the HELOC pull back, the main reason for my post was to warn people that even if they think that their house has not declined in value, they may be in a general declining area and have a reasonably good chance of having their HELOC suspended. If anyone is mid project like we were, it can be a big shock, so hopefully others can plan accordingly.

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

Anyone in the midst of a renovation, with a partially-drawn HELOC, who may not have seen this post on the first go-round may find it offers some useful advice.

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

ole joyful

Thanks Ole Joyful for bumping this up as I hope it does help someone.- just as a note, I did resubmit the new appraisal which justified the original HELOC way back before the end of April, and still (!) have not heard back from the bank. First they told me they would reply in 30 days, and then when I called they told me that it really could take 40 - 45 days. Anyway, even if you think you don't have an issue just realize the bank can change their mind at any time and you are on their timetable.

The agencies ceased their "Declining Market" program effective June 1, 2008. The "Memo" made it sound like they'd stopped the declining market penalties due to a multitude of complaints.

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

I'm a reporter for a major newspaper. I'm looking to interview people who have had HELOCs frozen in the midst of a renovation. If you'd be willing to share your story, please send me an e-mail with your contact information to june.fletcher@wsj.com. Especially hoping to hear from Jen4268! Thanks very much.

The reason HELOCs have a low interest rate is the agreement that the loan is secured by assets! What a poor idea to run down and borrow when that security is not there. Jen4268 might mean well and be able to repay her loan but that may not be as true for others. Many financial companies are in danger of failing right now. To push more bad loans at them is not the best idea. At the very least it will push up interest rates to customers in good financial condition.

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

We just got a HELOC. We had a problem with the first bank the broker tried to use. They refused to accept the appraiser's value on the house because we hadn't lived in the house for two years. Never mind that our loan was more than two years old & we'd been making payments the whole time. Because we were building in a development, we essentially had a lot loan plus construction to perm all rolled into one. We closed on that in 2006 but the builder didn't finish our house until the end of last Aug. The new appraised value was more than the build price & was app. the same as the tax value. The bank wanted to use the build price, which of course lowered our credit line. This despite us being in good financial condition, having good jobs, etc. We refused and found another company that accepted the appraised value.