Many people have set up a home equity line of credit (HELOC) to use in case of emergency or as a cash flow buffer for their businesses. Many investors even use their HELOC to buy foreclosures or international properties. All of these individuals may need to rethink their strategies. Several lenders have recently begun freezing borrowers' HELOC accounts without warning and without disclosing the reason for the freeze to the homeowners, according to an article in the New York Times. Washington Mutual, Indy Mac and the GreenPoint Mortgage unit of Capital One are specifically mentioned in the article.
According to the banks, the measures are being taken to protect themselves from declining property values, but even homeowners in markets which have not seen declines in value have been affected. These markets include: Yakima, Wash.; Appleton, Wisc.; Raleigh-Cary, N.C.; and Champaign-Urbana, Ill. So if you think you are protected because you are in a market thus far unaffected by the housing bubble, think again.
This news will be hard on those who were banking on using their HELOC for their business, investments or tax payment, who are now simply out of luck. The banks are within their rights to do this, and considering the housing market it is surprising they didn’t do it sooner, but the negative impact on the economy will surely be felt.
Let this also be a warning to those who were counting on the equity in their home to save them in the event something bad was to happen: Home equity is not a substitute for savings.