09-15-2010 05:03 PM
Several years ago I opened a HELOC (75K) against my primary residence. I used the bulk of it right off the bat to add on to the home - of which I have around 300K of equity into even under these crazy times. Anyway, a few years back when the bubble began to collapse my lender sent me a letter stating they've cut my credit limit down to around 20K - which i thought was odd since I had 73 (at that time) outstanding but whatever... I didn't leverage the HELOC for the revolving feature, rather it was just a feature if I ever needed it down the road.
Now, I've had 800+ scores forever, have no real debt to speak of and never had a single blemish on my report. I've been interested in picking up a few town homes to use as rentals, but got quite a shock when the credit was pulled -- 680. It was my own fault not for watching it close, but since I haven't had to buy anything in 3 years, it wasn't really a priority. After checking everything, it appears this huge hit is due to how the math is being calculated on the HELOC. It's listed as a credit line, secured --- but not anything to do with real-estate. If you check the util %, I'm like 260% over (20k limit and 70K outstanding will do that LOL). From what I'm already reading it seems this should have never happened because:
1) It's over 50K (50/50 rule), and from what I can tell, should have been based on the *original* limit when the loan was signed, not what they bumped it down to later
2) It's a HELOC, secured by real-estate rather than a free-floating entity.
My question is...are the above correct? Reading up on HELOC freezes it seems lenders have lowered limits on lines of what hasn't been used... not usually *after* there is a draw beyond that point. Did the lender even have the ability to do that? When I called they basically said "sucks to be you, refi it with someone else" -- problem is, the Wells Fargo guy for example said "they need to fix it first before we could even refi it, the score is killing you" so it's an infinite loop.
I'm looking for any recommendations on how to proceed. I'm pretty angry that this - what appears to be a simple mistake on how the item is tagged and thus calculated wrong - is murdering my ability to continue this other transaction.
Thanks in advance!
09-15-2010 06:19 PM
Incase it maters, my LTV is about 29% on the property. Looking back at the lenders reduction in the credit line (to 20K from 75K after maybe a year) was due to depreciation of the home. What's interesting is that the value they quoted is no where near reality... a home doesn't drop 200K in a single year then magically go up 215K a year later. Even Fannie mae currently puts the value around 498,900 which is on the low side for sure. Based on that I'm going to challenge them on how they assessed (320K) the property...I've got a feeling it was complete BS.
09-16-2010 04:28 AM
The current CL on the Heloc is what determines whether it is disregarded by the scoring model for utilization. The 20K CL puts it below the 50K-ish cutoff that EQ and EX use, and below the 30K cutoff that TU uses. Unfortunately, the person who decides policy at the bank that holds your Heloc apparently did not consider the Fico score impact of slashing the CL unnecessarily. The more sensible move, which many other banks have done, is to slide the CL to slightly above the balance, and simply keep "available credit" at $0.
If a reasonable current valuation of your house is high enough to cover your mortgage plus cover your 75K limit Heloc with the same LTV as required by the original Heloc terms, it would seem you have a good reason to request that your bank reset the CL to 75K. They can always set "available credit" at $0 to protect themselves. The only possibility for them not to do this (that I can think of) is if the 75K to 20K slashing was part of an across-the-board action to reduce their exposure numbers on their balance sheet. If that was the case, they probably don't care too much about being reasonable with their customers. If your house valuation is strong enough, you might want to look into refinancing the Heloc with another lender who is not so schizo. Another approach could be to refinance the Heloc as an equity loan and then it will be regarded as an installment account - of course, that would depend on your current Heloc rate vs. available equity loan rates.
The Heloc itself is a revolving account; the fact that it is associated with the house just makes it a secured revolving account. And if the house devalues sufficiently (not in your case, but in many others), it essentially becomes an unsecured revolving account which acts the same as a credit card, which is why Fico scoring models treat it as such. The risk factors underlying the scoring model are sound, it is the bank's paranoia (or balance sheet tweaking) that has caused the undeserved score decrease. In most cases, a credit card company might balance-chase, but would not usually make a comparable drastic move (slashing to 25% of the original CL) without reason ...
09-16-2010 05:25 AM
Thanks for the info. I'm going to contact the lender again today and challenge them on their decision to cut the heloc from 75K to 20K limit based on a totally eroneous devaulation of the property (which I found the original letter in my documents). I'd love to change companies all together - this lender is flaky as can be. When I talked to my wells fargo guy (my main mortgage and my rentals) he sent me down this path, but he kinda hinted that they couldn't refi it until someone fixed it - the score is essentially sticking me in a catch 22 scenario. I'll pursue all of this agressivly to get it fixed one way or another.
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