Disappearing Equity Lines And Mortgage Foreclosure

It’s hard enough now to get a new home equity credit line. Lenders have restricted their underwriting guidelines, subprime lenders have closed, and real estate values have declined. But surprise, surprise, even those who already have an equity line may find that is has suddently disappeared. The NY Times is reporting that major lenders are freezing home equity lines because of a concern over declining values. This may happen even to those who have good credit and are current on payments. For those in foreclosure or who are close to defaulting on their first mortgage loan, this has some significance.

Although it is never a good idea to rely on an equity line or a second mortgage loan to bail out a first mortgage loan default (because you may likely only end up deeper in debt without the ability to repay it), there is one limited instance where relying on a credit line to cure a default on a first mortgage may make sense. That is if you are certain that you will have a source of income coming soon, but perhaps not fast enough to satisfy the first mortgage lender. By this, I don’t mean the lottery. But perhaps you have a customer who will be paying you based on a contract and you are comfortable that he will actually keep the promise to pay. Or perhaps you have a year end guaranteed bonus and you feel relatively comfortable that your employer will keep that promise. You’d also need to be sure that whoever is going to pay you that money is not going to file a bankruptcy case and make you wait. So, in the limited case where money might be coming in within a few months but you need some cash immediately for the first mortgage, then it might make sense to rely on the home equity line for this as a temporary measure, so long as you are prepared to use your income to repay the credit line very soon afterwards.

If you fall into this scenario, the recent freezing of credit lines by lenders may mean that you no longer even have the credit line you thought you had, even if you paid fees to close it (get it approved) and even if you made all of the payments. If your lender has not frozen your line, it may be considering that soon. Apparently, some equity line agreements may give lenders the right to do this. You need to ask yourself whether it’s a good time to draw down on the line now before it’s gone completely.

Here’s the article.