What Should You Do When Your HELOC Freezes Over?

by Broderick Perkins

Lenders are freezing, slashing, and cutting off home equity lines of credit (HELOC), but there's a growing manual of strategies you can use to avoid or mitigate what could be financially debilitating.

Some say it's better to take the equity money and run before lenders make a move. And why shouldn't you prudently cover your assets?
After all, lenders cover their assets when they reduce your home equity line of credit (HELOC).
When your lender issued you the credit card-like line of credit backed by your home, chances are, your home value was much higher.
Now with shrinking values, lenders want to shake you down to reduce the chance they won't get paid should you default on your home -- which now may be worth less than the total of your outstanding mortgages.
Consider it a home equity loan meltdown as home equity stakes have been stumped.
Maybe you didn't use proper home equity protection practices.
In any event, the Federal Reserve offers the latest come-to-your-rescue tips for dealing with home equity that's been hammered.
• Read the notice your lender sends you. Your HELOC lender must provide you a written notice if they have frozen or reduced your HELOC. Your lender must send the notice to you no later than three business days after the freeze or reduction. The notice also must include information about any other changes to your HELOC.
• Call your lender. Even if you have a good payment record, if your home's value has fallen, your lender may freeze or reduce your HELOC. Contact your lender if you have questions or concerns about a freeze or reduction.
• Learn why your lender froze or reduced your HELOC. A freeze or reduction notice should include specific reasons for the action. The most common reasons for a HELOC freeze or reduction are, again, a decline in the value of your home, or a change in your financial circumstances.
Understanding your lender's reasoning may help if you want to take steps to have your credit line reinstated to its original amount. For example, a lender may not be aware that you made significant equity saving home improvements to help shore up the value of your home and its equity.
Or, if your financial circumstances changed for the worse and that change resulted in a lower credit score, investigate ways to rebuild your credit.
• Ask your lender how to have your HELOC reinstated. Your lender must reinstate your credit privileges when the conditions permitting the freeze or reduction no longer exist. You may need to put in writing your request to have your line of credit reinstated. Once your lender receives your written request, they must promptly investigate and determine whether your HELOC can be reinstated.
• Remember that your lender can impose fees for reinstating your HELOC. Fees include costs for an appraisal or credit report. Your lender cannot, however, charge you a fee to reinstate your credit line once the condition that caused them to freeze or reduce your HELOC no longer exists.
For more information: New federal consumer protections for HELOCs are in the pipeline.
Published: September 10, 2009