It appears as though the decrease in home values and the tightening of the credit crunch have caught up not only to home buyers and sellers, but homeowners. While not very prominent, some of the major banks including Bank of America and Washington Mutual have begun freezing existing borrowers home equity lines on their existing home.
While it is unclear on what will raise a flag which may freeze your existing line of credit, it is clear that you may not be immune from it. These freezes have nothing to do with the borrower’s credit score or repayment schedule. In efforts to protect their own interest and stay ahead of the curve, the banks are reducing, readjusting and removing existing lines of credit in certain situation based solely on property value from their automated programs.
In certain markets, where prices have adjusted downwards 10% or more, it only makes sense that the banks would do this when presented with the opportunity. The bank’s chief equation for determining how much to lend is based on the loan to value, or how much money is borrowed compared to the going market rate for the home. For example, a home buyer purchasing a $1,000,000 home may have borrowed $900,000 which would have included an $800,000 first loan and a $100,000 second home equity line. The combined loan to value (LTV) for this situation would be 90% ($900,000/$1,000,000).
Fast forward two years and now the home buyer has paid down their home equity line to zero, so in essence they have only one loan outstanding with $800,000. The home equity line which is now paid down to zero typically acts as an open line of credit, so traditionally speaking, the borrower would have unrestricted access to pull up to the original balance of $100,000 should they need the money for an emergency or remodeling. What is recently occurring however is that the banks are freezing the home lines of equity because of the decreased they are seeing in the housing markets.
Take our example of the $1,000,000 home and a decline of 10% in the market value to give a new value to the home of $900,000. And remember that the banks agreed to lend up to 90% loan to value of the property. So if we take the new price of $900,000 and lend 90% that would result in total loan commitments of $810,000. Since there is an existing first of $800,000 we may see the second line of equity being capped at $10,000 thus maintaining the original 90% LTV or a maximum loan amount of $810,000.
Many home owners such as myself pay down the equity line because of the convenience of being able to tap into the funds if needed. Now with this latest developments, nervous homeowners are prematurely drawing the funds available from the equity line and placing the money in another financial institution to ensure that should they need this money, it is available for them to access. While we have not seen this move from the banks occur too many times, it has happened enough where you should be aware of the situation. If you or someone you know may be in this situation, please contact me or your financial professional to see what your options may be.
Chris Kamali is a TriValley Real Estate Agent, helping clients buy and sell homes in Dublin, Pleasanton, San Ramon and Livermore.
