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Five tips for borrowers who find their HELOC has been reduced

By Amy Hoak, MarketWatch

Last Update: 6/29/2008 3:30:00 PM

CHICAGO (MarketWatch) — When Denise Lopez bought two new tables, a floor lamp
and a chair recently, her intent was to finance it with her home equity line of
credit. But it wasn’t long before she discovered that wasn’t an option — her
HELOC had been frozen.

The purchases for her West Palm Beach, Fla., condo were made initially on her
American Express credit card, and she then wrote a check against her HELOC to
cover them.

“Not only was I declined, but American Express charged me $35 for a check that
bounced,” she says. She had a zero balance on the home equity line of credit when
the transfer was attempted; she didn’t need to use the line, but said she chose
to so she could keep the HELOC active.

Lopez’s situation isn’t unique. As lenders recoil in an environment of falling
home prices and mortgage defaults, many have been reeling in lines of credit or
freezing them outright. Lenders say they notify their borrowers when these
changes are made, often by mail.

Lopez didn’t recall seeing a notice until it was too late; her lender, HSBC, says
that a letter was sent. In the event that clients don’t find out in time, they
can be reimbursed for a bounced check fee if they provide proof of the charge,
says Francine Minadeo, manager of public affairs for the lender (HBC).

Lenders say they’re reducing existing HELOCs in markets that have been
experiencing significant declines in property values.

Banks including Bank of America (BAC) and Washington Mutual (WM) say there’s a
process in place for customers to appeal these decisions. Washington Mutual
spokeswoman Sara Gaugl said that clients who have had lines decreased often still
have access to available credit.

“If the homeowner feels their situation is different, we will listen to them,
particularly if they have an independent appraisal that shows their home has been
spared from neighboring drops in home value,” said Bank of America spokesman
David Bradley.

But, as Lopez can attest, an appeal doesn’t always bear fruit. Her lender refused
to budge, she said.

It’s easy to see how this scaling back can make a homeowner — especially one
with her debt under control — feel blindsided when the available credit comes up
nil, said Greg McBride, senior financial analyst for Bankrate.com.

In fact, at times it seems that “the banks are freezing the HELOCs first, and
evaluating case-by-case later,” said Julian D. Hebron, loan consultant and vice
president of RPM Mortgage in San Francisco.

One client of his recently had a line frozen, even though he earns a hefty
paycheck, has substantial equity in his home and has “perfect” credit.

A reduced credit line can be a challenging situation for those in the middle of a
home-improvement project or those who counted on the funds for college tuition.

For others, having a line of credit frozen may be “a blessing in disguise,” said
Gary Smith, a professor at Pomona College in Claremont, Calif., and co-author of
the book “Houseonomics: Why Owning a Home is Still a Great Investment.”

“A home is not supposed to be an ATM,” he said, adding that using that line of
credit for a new plasma TV or an extra car isn’t wise in the long run. “You don’t
really have to have so many cars and vacations and the biggest TV on the block.”

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