San Carlos Home Equity: Use It or Lose It…
September 14, 2009
For many years, the home equity line of credit (HELOC) loan has become synonymous with home ownership. And why not? With home prices on a continual rise in desirable cities like San Carlos, home values and their respective equity grew seemingly overnight. The banks made it insanely easy to get at HELOC, too. No points, no application or appraisal fees. Just a few forms to fill out, and your checkbook magically arrived in the mail a few weeks later.
It was easy money for the banks, too. With the job market booming, mortgage default was almost unheard of. And if it did happen, the home could be sold in the red-hot market at a high enough price to easily cover both the primary mortgage and the HELOC, which takes a secondary position in line behind the first mortgage (this is important.) HELOC rates were typically a couple of points higher than the first mortgage, so the banks reaped huge returns on these loans.
When the bottom fell out of the market a couple of years ago, the paper equity of homes vanished into thin air. As job losses drove the mortgage default rates to record highs, HELOC lenders suddenly found themselves in a very risky position — their secondary position behind the primary mortgage holder meant that there was often nothing left over after the primary lender foreclosed on a home. Instant equity became instant loss.
This prompted the HELOC lenders to take the unprecedented step of freezing HELOC's almost indiscriminately. Indeed, as I documented in the post “Home Equity Freeze-Out” many San Carlos home owners got a surprise letter in the mail in October of '08 stating that their HELOC's had been frozen or severely curtailed. For those who were borrowing against that line, their credit limit was immediately capped. If the were just keeping it for a “rainy day” fund and hadn't used any yet, the lines were often revoked entirely — regardless of how much equity the owner had in the home.
This article in the San Jose Mercury News certainly caught my attention: Homeowners outraged over cancellation of their home equity lines. Apparently, some homeowners are striking back at the lenders by filing lawsuits to restore their lines of credit. I'll be first to tell you that I'm not a lawyer, but I have to believe that somewhere in that stack of paperwork we signed (but probably never read) there's a clause that allows the bank to cap or revoke the line of credit in the event of a falling market.
The homeowners have a point in some cases — in the justification for revoking the credit line, they bank often assigns an absurdly low value to the home in question. I've seen San Carlos valuations as low as $300/square foot in some of these letters. I bet home buyers today wish that figure was true!
Use it or Lose it…
What are your thoughts on this lawsuit? Do homeowners have a right to sue the lenders in this situation, or is it a sour case of entitlement?
One thing is indeed clear…If you have HELOC with an available balance, that balance is probably in jeopardy. If you haven't already done so, it might make sense to talk with your CPA or tax attorney to see what your options are. Because it's clearly a case of “use it or lose it' for many.