If you haven't heard yet, many banks are lowering your available balances on Home Equity Lines of Credit (HELOCs) and informing you via the mail after the changes have been made.  The bank that holds the Note on your HELOC can cut your line of credit right down to your current outstanding balance.  They will not call and warn you first, it will just happen and you will have no recourse. 

In example,... if you have a $100,000 HELOC on your house and are currently using $25,000 of it, the bank can cut your line down to $25,000 max leaving you without access to the remaining $75,000.  For some people this will not matter much, but for others, this could be devastating as they could be depending on access to that money.  

Now, this is /was a pretty aggressive move by many banks to save their butts and not get sucked into additional negative equity situations that result (for some) in foreclosure.  As much as I think that banks should have informed their borrowers of this maneuver, I understand why they did not. 

The reason why I am rehashing this news is to inform you of the next move by banks to save their skins on HELOCs

Last week, National City Home Equity (NCHE) shared a new policy with me during a refinance of one of my clients.  They are no longer accepting sub-ordinations on 1st lien position loans.  This is a new policy that can quickly be adopted by many institutions. 

For those of you who don't know NCHE stopped taking loan applications in the fall, they closed their doors in the winter, they were one of the first banks to cut HELOC balances, and now they will not allow you to refinance your 1st mortgage without replacing their loan with another bank's product.  They are basically getting out of their HELOCs any way they can.  So, why is this a big deal?  Because it can stop you from refinancing into a better 1st mortgage. 

Lets pretend that you have a 1st mortgage of $250,000 (6.75% 30 year) and a home equity line for $50,000 (of which you are currently using all 50K @ prime+0 ).  Your house is currently worth $350,000 so you have a 85.7% combined loan to value (CLTV). Now lets say that rates on a 30 year fixed come down to 5.875% and you want to refinance so you can save $200/month.  If NCHE (or other banks who adopt this policy) wont allow you to refinance you 1st mortgage only - you will have to either combine that HELOC balance into your first, or find a new home for your HELOC.  Being that guidelines are getting more strict every day on both 30 year fixed and HELOCs - you could be in a situation where you can't refinance because you do not qualify to combine both liens into one (86% with PMI) or qualify for a new 2nd mortgage.

Now lets take the above scenario up a notch into a more severe scenario -  instead of a 30 year fixed at 6.75% lets say you have a 3 year ARM that is going to adjust to 8.29% in 5 months and you cannot refinance because your HELOC note holder will not let you sub-ordinate.  That is a scary proposition.  Especially if you are self employed - because they do not have many stated 2nd mortgages or stated 1st mortgages that go to 90% LTV/CLTV anymore.

Conclusion- If you have a HELOC with NCHE it is too late, you will have to replace that loan product at some point.  But, if you have a HELOC with a balance and you are thinking of refinancing your 1st mortgage into a better rate (rate & term) because rates are down - look into it ASAP.  If you have an ARM that is coming due and you have a HELOC with a balance - look into it ASAP.  If either of these scenarios apply to you, and you are self employed (stated income) you should call your lender today.

Please contact me with any questions on this.  Knowledge is Power!

 Jim Cunningham

Community First Financial, LLC

7575 E Redfield Rd   Suite 235

Scottsdale, AZ  85260

480-305-8900 ext 305 - office

480-907-2435 - fax

602-434-8261 - cell

jcunningham@communityfirstfinancial.com

http://www.communityfirstfinancial.com/

http://www.jimcunninghamcff.blogspot.com/

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