Big Home-Equity Credit Squeeze

by Joanne Cleaver | Mar 9, 2009 | Comments

Key Stats

• Smaller loans: Some home equity lenders that previously financed up to 100 percent of a home’s value now lend up to only 70 percent or 80 percent.
• Rationale for lower HELOC caps: Lenders rely on computer-generated automated valuation models (AVMs) to estimate home values.
• Appeal route: To appeal a reduction in your credit limit, go through a bank employee who specializes in HELOCs.
• What’s next: If home values continue to slide in your area, brace for more AVM-generated notices.

You may be counting on your home equity line of credit, or HELOC, as the source of funding for a long-needed roof repair or as a potential source of emergency cash. Well, your bank may have other ideas.

As one more turn of the screw in the credit squeeze, lenders have been cutting the maximum amount borrowers can draw on their credit lines, due to eroding home values. That not only can leave you short of cash at an embarrassing moment but can lower your credit score.

And here’s the final indignity: A reduction in your “HELOC cap,” as it’s called, doesn’t necessarily mean your home value has fallen all that far — only that some computer thinks it has. This is something you don’t have to take lying down.

The Trouble With Computer Models

Lenders use computerized automated valuation models (AVMs) to quickly estimate the value of houses in their portfolios. The AVMs collect home-sale data from publicly available property records, says Mark Fleming, chief economist at First American CoreLogic, a database firm that conducts HELOC analysis for lenders.

Here’s the problem: AVMs lump in data like foreclosures and short sales that distort the average local values. So you might be prevented from borrowing against some of your home equity based on faulty figures. Worse, your credit score could fall as a result of the unfair HELOC cap.

Radiologist Sherelle Laifer-Narin found out the hard way that AVM-generated estimates don’t always align with market realities. In 2005, she bought an $850,000 townhouse in suburban New Jersey and secured a $150,000 line of credit, which she used sparingly and immediately repaid. But last September, her lender, JPMorgan Chase, slashed her HELOC cap to $19,000. Laifer-Narin asked a Chase loan officer for an explanation. The loan officer plugged Laifer-Narin’s address into Zillow.com, a home-valuation Web site, which said the home was worth more than Chase had estimated. Basically, Chase’s answer was, “The computer did it,” says Laifer-Narin. She then hired an appraiser, who determined the home was worth $950,000, and appealed to Chase. “Based on the appraisal, I should qualify for over $100,000,” she says. “I’m hoping to find out very soon.”

How to Appeal

If you think your HELOC cap was snipped inappropriately, you should appeal too. Your chance of winning is fairly good. Bank of America grants about 20 percent of requests from homeowners to reinstate their HELOC limits, says a spokesman for the bank. Best odds of success: when you’re in the middle of a transaction being financed by the HELOC, such as an ongoing renovation project or a drawdown for your small business’s cash flow, backed by receivables.

To appeal, call the phone number on the notice that said your lender was trimming your loan limit and ask for an explanation of the process. Get a legitimate valuation from an appraiser, who will tour your house, note improvements you’ve made, and consider factors that don’t show up in an algorithm-generated estimate. Expect to pay at least $400 for the appraisal. There are two other ways you can bolster your case:

If you have the time and patience, sift through public home-sale records to compile a market analysis indicating the likely value of your house.

If you want to spend less time, but a little money, order a consumer version of an AVM report. For $19.95, HomeSmart Reports will issue a report analyzing recent sales of houses comparable to yours.

Submit to your lender the appraisal, a cover letter, and any other documentation — such as photos and contracts for in-process renovation projects. Expect the decision to take a few weeks.