Chase Bank began freezing home equity lines of credit at suspiciously lower levels approximately a year and a half to two years ago. The Chase Bank home equity line of credit freeze led to a homeowner led class action lawsuit.
With the explosion of possibly overly aggressive or unfair foreclosure action in the past two years and longer, one wonders how much the banks unfairly freezing home equity lines of credit may have then caused some homeowners to be foreclosed upon prematurely.
There are debates as to whether or not home equity lines of credits, aka HELOC's, are a homeowners "right" or not.
However, when a homeowner has actually already paid off their home, does not want to move because they have established deep roots, and is equity rich but cash poor, taking out a home equity line of credit is not a rash or irresponsible move.
The act of initiating a move can cost the homeowner 50,000 dollars when ALL of the associated costs realtor and moving costs are taken into consideration. So staying in the present, paid off home and taking out a home equity line of credit can actually be the most cost effective move for someone who is home equity rich but cash poor.
Lets say a homeowner has paid off a 300,000 dollar home, and then would like to take out 60,000 home equity line of credit against the home. The homeowner slowly goes through the 60,000 dollars, using it pay for unexpected medical occurrences, lower priced college tuition, and so on.
Just as they approach the 60,000 dollar threshold, some really bad stuff happens, culminating with the loss of employment. Unable to make the modest payment on the 60,000 dollar home equity loan, the bank repossess the home.
The heartless, arrogant, "I told you so crowd" would probably say, "too bad, it's the homeowner's fault" for taking out the home equity line credit in the first place. However, the homeowner may have actually been doing the prudent thing by staying where they are rather than moving and incurring huge moving and realtor costs, not to mention the possibility of a raise in yearly property taxes.
But lets break this situation down a little more. The homeowner has still 240,000 dollars of equity in their home. Even if the home cost significantly less than 300,000 dollars 20 or 30 years ago, the homeowner over that span of time still paid tons in property taxes, made maintenance and IMPROVEMENTS to their home, and with assessed interest charges still paid at least double what the house was worth back then, maybe even three times as much.
So the homeowners explains to the bank that they would like to "bump up" their home equity line of credit from 60,000 to 100,000 dollars to tie them over until new employment is found, or to buy them plenty of time to actually sell the home and move into a smaller home. Oh wait, without a job, they won't be approved for any new home loan.
Even if the homeowner sold their home for 300,000 dollars and paid off their 60,000 dollar home equity line of credit, and was left with 240,000 minus realtor and moving expenses (probably left with around 200,000 to 210,000), they will now have to look for a home for well under 210,000 since they have no present employment and will still need money to live off of.
In essence, if the unemployed homeowner tries to move, they could be put in a position in which they have to pay for their new house in full, and, then won't be able to take any money out in the form of equity if they don't have a job.
If the new home they move into is significantly lower in price than the home they moved from, they may be hit with IRS tax obligations on the alleged "profit" made by being forced into a much cheaper home because they have no current income. This is getting ugly!
So if the bank says no to the 60,000 dollar home equity line of credit increasing to a 100,000 dollar home equity line of credit, the homeowner could be put into a position in which they lose they are foreclose upon and lose 240,000 dollars of built up equity, almost overnight.
And as this is happening, did the bank ever offer a reverse mortgage option that might keep the homeowner in their home for the next 10 years rather than foreclosed upon overnight???
I respect the banks right to not allocate a home equity line of credit that will not be repaid. However, I was told by a banker that banks figure 67% of the value of a paid off home is the maximum safe amount of money the banks are comfortable allocating.
If the banks have recently reappraised a homeowners home resulting in an inevitable reduction in value of the home, plus the 67% max home equity line of credit threshold, means the bank is risking no more than 40% to 50% resale value for a home that could one day increase in value to what it once was.
In other words, even at the 67% threshold figure of a new appraisal, the risk to the banks if the homeowner does not pay back the HELOC is SIGNIFICANTLY offset, by the reduction in value by the new appraisal plus the 33% equity cushion the banks require.
How many homeowners have lost their previously completely paid off home because they only received a marginal amount of home equity line of credit, say, 25% or only 30%, or 35%, even though their homes were already paid off?
The media does not often do stories on foreclosed homeowners who had paid off their home but then lost it because of a low home equity line of credit and an unforeseen emergency, but they are out there, and possibly in the millions.
In many instances homeowners who actually had paid off their homes may now be the silent victim of foreclosure based on Home equity lines of credit unfairly frozen at very low levels.
For so long these homeowners dutifully paid their monthly mortgage until they owned their home in full. But then the shame of not being able to make a payment on a small home equity line of credit loan because of unemployment, that then led to the loss of their home to foreclosure, may represent too much loss of honor to bear in public, and these proud homeowners remained silent as they lost everything.
I have yet to see one news story about home equity lines of credit being frozen at low levels, yet it could be just as nasty as what has happened to those who are upside down on their homes.