A couple gentlemen came into the office today and the subject came up about home equity loans. The conversation started with the notorious recent freezes implemented on home equity lines of credit and then quickly went down the road of loan modifications and they were wondering if lenders are modifying these HELOC’s.
What they didn’t realize and many consumers do not know is that this act of freezing a mortgage contract unilaterally may be in violation of the law or their mortgage contract and there may be a possible legal claim. So, this in itself may force a modification as a mediation tool with ones servicer or possibly litigation, if that is the desired route.
Lenders must decide whether to freeze lines of credit on a loan-by-loan basis, and home equity loan contracts generally allow borrowers to challenge a lender’s finding that the borrower’s home has in fact decreased in value.
According to federal statutes posted on the FDIC’s Web site, “a creditor may…reduce the credit limit” available for a home equity loan if “the value of the dwelling that secures the plan declines significantly below the dwelling’s appraised value.”
Lenders have increasingly taken advantage of those rights, says Lampe, as properties around the nation have fallen in value.
The facts are that lenders are not allowing borrowers to contest these “lender initated” frozen equity lines and this concerns many consumer advocate attorneys. This may open the doors to a feeding frenzy of lawsuits from cash starved consumers and blood smelling attorneys.
Back to the meeting.
One of the guys I was meeting with had his HELOC frozen at $33,000 and the other much higher at around $230k. Both of their homes had a decline in value of approximately $200,000.
By the way, they are top producing Realtors.
The good news about these two bright guys is that they had plain vanilla 30 year loans and solid incomes. Plus, they have great credit profiles and their financial portfolios are far from hurting. Yes, I know that is rare in the rough and tumble real estate world where many Realtors are on a strict diet of short sale soup, slim commissions and many are being foreclosed on themselves.
Unfortunately, for two guys who seemed to do everything right, I believe that their servicers will not be willing to help them at all and I explained the logic behind my conclusion with them. I told them that they are not a risk of loss to servicer or their investor and with that said, they will not assist someone who clearly can afford their home and their loan. Plus there is no hardship taking place with your mortgage or your life.
They both understood clearly, but they weren’t too happy as are many homeowners out there that didn’t take out risky adjustable rate mortgages or were steered into something they couldn’t possible afford.
But what is, is and we can’t change the fact that every single homeowner in this country will be affected in one way or another. It doesn’t matter who you are. From straight edge Joe with the sugar free vanilla 30 year fixed with 20% down to wild and crazy Larry with the Option ARM at 95% loan to value and is paying the minimum payment.
Higher-quality borrowers – and especially the wealthier among them – can find it insulting to open the daily mail only to find their credit lines cut. While lenders would ideally use more personal methods – say, a phone call – to alert borrowers to the coming change, “no one’s staffed to do that,” says Bankhead.
Since wealthier borrowers often use private banks or other lenders that cater to high-end clients, they’re “much more likely to get a call with a head’s up than the average borrower is,” says Bankhead.
But with home prices still falling around the nation, attorney Lampe says borrowers of all stripes should be digging out their mortgage paperwork and reading through the terms and stipulations with a fine-toothed comb, to avoid being surprised when their lender shuts off the home equity spigot.
Many borrowers took out loans when housing values were booming, and rarely did a close read of the paperwork.
“The time is now,” says Lampe, “to get the paperwork out and read it again.”
The loan documentation provides that the right to suspend arises “if their has been a substantial decline in the value of the [subject] property.
This puts the burden on them to show a substantial decline in the value of your property. I do not believe that showing a decline in a national or local market is sufficient. Theoretically they would need to get an appraiser to appraise your home and show a delcine substantially below the value of the appraisal when the HELOC was established.
They have not done this.