Coping with Home Credit Cuts
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,
href="http://www.homesmartreports.com/">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.