By Aleksandra Todorova
April 24, 2008
TERI GRUBAR, a 46-year-old small-business owner in Minneapolis, isn't the type to pay a bill late or bounce a check. So when the owner of the tree service she had hired to spruce up her yard rang her bell earlier this month, angrily waiving a letter stating that her $3,000 check had bounced, she knew something was wrong.
A call to Citibank threw her into further disbelief: Her home equity line of credit, or HELOC, which had $20,000 in it for the occasional home repair or cash emergency, had been closed. It wasn't her fault. As the bank explained in a notice she received a few days later, her account was suspended because her home value had "significantly declined."
"This has affected me financially and emotionally," she says. "I'm self-employed and sometimes it can be a couple of months before I receive payments. Now I've got nothing to fall back on."
With house values plunging across the country, hundreds of thousands of homeowners find themselves in Grubar's situation. Many large banks, including Bank of America (BAC1), Citigroup's (C2) Citibank, J.P. Morgan Chase (JPM3), Countrywide (CFC4) and Washington Mutual (WM5), have confirmed that they're reviewing HELOCs and are either decreasing available lines or closing them altogether. To determine which HELOCs to suspend, lenders are using monitoring systems that flag accounts in areas where home values have dropped significantly. Citibank and Washington Mutual say they may also consider individual borrowers' payment history and credit.
Driving this trend is the increased risk lenders face as home prices plummet and delinquencies rise, says Keith Gumbinger, vice president of mortgage research firm HSH Associates. "When you lend money to someone against the equity in their home, you are doing so on a secured basis," he explains. "If they owe in excess of the value of the home, you could never recover what you're owed in the event of a default."
This new risk-management measure, however, is hurting consumers in unexpected ways. Barbara Clark, a 57-year-old homeowner in Fort Pierce, Fla., was shocked to discover that shortly after Citibank suspended her $80,000 Citibank HELOC, her credit reports from bureaus Equifax and TransUnion listed the account as "derogatory." Clark, who monitors her credit religiously since she's about to start shopping for a new mortgage, immediately disputed the item. Equifax corrected the error, but things have only gotten worse with TransUnion, which changed the account status to "collection/chargeoff."
"I've been working really hard trying to resolve this, and the longer I've worked the worse it's gotten," Clark says.
In a written statement, TransUnion said the credit reporting companies collect information furnished by lenders and if a lender reports the account in a "manner that is derogatory in nature, then that, in turn, is how the item will appear on the report." Citibank declined to comment on specific customer accounts, citing privacy concerns, but said that "as we report it, the change is not a derogatory item." The bank advises customers to use the original notification letter in the event the bureaus misinterpret the information.
While there's nothing you can do to prevent a HELOC suspension, there are ways to avoid such disastrous consequences. Here's how to face one well-prepared.
Monitor your credit
If reported to the credit bureaus correctly, closing or decreasing a HELOC should have no effect on your credit score whatsoever, says John Ulzheimer, president of Credit.com Educational Services. Unlike credit cards, HELOCs aren't included in your overall credit utilization ratio, which is based on the percentage of the total available credit that you've used. However, if the account is reported incorrectly, things get a lot more complicated.
The problem is that credit-monitoring services may interpret the data they receive from lenders differently. When Clark initially pulled her credit report through TrueCredit.com, the account was listed as "derogatory." But when she pulled her reports from MyFico.com — the consumer-service arm of Fair Isaac, which calculates FICO scores — the account was listed in good standing. According to Steven Katz, a spokesman for TransUnion, which owns TrueCredit.com, the information in credit reports should be the same across all services. But, according to Ulzheimer, the "derogatory" listing in Clark's report is possibly the way TrueCredit initially interpreted the information from Citibank. Now that TransUnion has changed Clark's account's status to "collection/chargeoff," it will likely impact her Fair Isaac credit reports, significantly impacting her ability to secure loans, explains Ulzheimer.
To avoid such confusion, buy your credit reports and scores from Fair Isaac6 directly or use AnnualCreditReport.com7, which gives you one free credit report per year (but not a score) from each bureau. Should you discover any errors, correcting them could be a mighty battle8, as the credit bureaus and lenders keep passing the blame to each other. If you suffer monetary damages because of such mistakes, seek the help of an attorney, says Sam Glover, a consumer attorney in Minneapolis. (He doesn't handle such cases.) Find one in your area through the National Association of Consumer Attorneys9 (NACA).
Appeal the freeze
A lender's assumption that your home's value has fallen isn't always correct. "Remember, lenders are painting new risk-management criteria with a very broad brush," Gumbinger says. "Your home may be in a ZIP code that's been tremendously challenged, but that doesn't mean that your home is challenged."
You can appeal your lender's decision, but it will cost you since you'll have to submit a home appraisal from a service approved by the lender, which can cost as much as $300 or $350.
Shop around
If you've been cut off, you can try to find another lender, Gumbinger says. Look locally — there might be smaller banks and credit unions still promoting HELOCs. "You're trying to borrow your own money, so don't leave a stone unturned," Gumbinger says. Just be realistic: If your HELOC extended you to owing 100% of your home's value, don't expect to find another one in this environment.
Tap the line now
If you're worried that your lender may close your HELOC and you know that you'll need the money, it may make sense to tap the line now and deposit the cash in a high-yield savings account. Just keep in mind that most savings account yields have dropped dramatically so that money won't grow by very much while in the account10. Also, don't forget that you're putting your home up as collateral, says Gerri Detweiler, a credit educator and author of "The Ultimate Credit Handbook." So you should only do this if you're certain you won't suffer a loss in income that may prevent you from making loan payments.
0 comments:
Post a Comment