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| Sunday, March 30, 2008 |
| Nina's had another HELOC drastically reduced |
Nina, founder of the QueerCents blog, has recently posted: Citibank Freezes Home Equity Lines of Credit Aside from that, I’ve done most things right and for forty, I’m in a good place financially. I’ve always considered my primary residence to be one of my most solid investments. So it came as a surprise yesterday when we got the letter from Citibank about our $168,000 line of credit:
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Reduced to $10,000!? Hello!? Please don’t f-ck with my house in Newport Beach…
Of course, I’m calling them today to dispute it. Why? Because unlike the Phoenix property, I believe I can prove our home has retained its value and hasn’t declined. We have a Newport Beach address but live in what I’d describe as the low rent district of the city. It’s on the cusp of Eastside Costa Mesa and I believe the lender is using comps from Costa Mesa for comparison. Nina states that she had earmarked the untapped $168,000 HELOC as her "catastrophe fund" which is above and beyond her emergency fund.
Now, way back in March 2006 I posted about Nina's HELOC - Home Equity as Emergency Fund? - and way back then I said that I did not personally believe in HELOCs as a viable financial cushion.
Let me try to express a bit better why I have never taken out a HELOC and why I never really saw them as a necessary tool in my overall financial plan (a lot of well respected financial advisors and columnists disagree with me and believe HELOCs are a good thing - so I go against prevailing advice on this one folks!)
In my view, HELOCs are glorified credit cards - ones which can have mind boggling spending limits. However, unlike credit cards HELOCs generally cost you something to acquire (fee to set them up, fees for appraisals, fees for points - these can all vary and some credit lines will cost you more than others - but generally they cost something) Now unlike credit cards, HELOCs can be tax deductible - so the cost of the money borrowed and the fees spent to set-up the credit line may be offset by tax savings - but pay attention to that word offset - again, not free - just might be cheaper.
Now what do you get for all the money and effort spent opening a HELOC? If you are like Nina, you get the comfort of knowing it is there. She has not tapped hers, it is like an insurance policy for her and her family - a place she can go to get money if all her other resources have run out. As she puts it - her catastrophe fund. That all sounds good until as Nina has now experienced twice, you find out that the bank can close that HELOC at its own discretion. So her peace-of-mind line of credit is gone, without ever having been used.
I understand Nina's frustration and outrage. Similar howls would be uttered by any of you reading this now if you suddenly found out the credit cards in your wallets had been canceled on you. Something that could happen to any of us, since it is at the credit card companies discretion that we have those accounts. Just like it was at Nina's banks discretion that she had an open HELOC account with them - up until they decided to no longer keep such an account open.
Just as I would be miffed to suddenly learn I have to go back to paying cash for all my daily purchases if my credit card was suddenly canceled, I can understand Nina's feeling of outrage that her "catastrophe fund" was suddenly taken away. But this brings me back to why I never paid to open a HELOC myself - I have always known that a bank could close it on me at any time. I try to live by the philosophy of saving for things first before buying them. An open credit line worth tens of thousands of dollars would be a huge temptation for me. Why pay to tempt myself? Then there is the argument that the HELOC is there when all other options are exhausted. I am somehow unable to work and I have blown through my savings. If that was ever to happen, my feeling would be, I would rather sell the house to meet my needs than take on more debt during my crisis. Just as I would not run up my current credit cards to a point where I could not pay them off every month, I would not want to run up my HELOC to a point where I could not easily pay it off. So why get a HELOC then? Why not just save the money for a future kitchen remodel or save cash to cover a period of unemployment or other financial crisis?
So that is what I have always done, I have saved for my needs and have not tempted myself by relying on things like HELOCs for a feeling of financial security. Just as I would not rely on my credit cards to see me through a period of unemployment, etc. So to bring this rambling post to a close; personally I feel sorry that Nina is distressed by her banks decision, but this is a good lesson for all of us. Access to credit is not a right nor a given - it just has felt that way for a long time. If you really want peace of mind for future catastrophes you have to stockpile your own cash reserve. |
| posted by Boston Gal @ 8:01 PM *
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| 6 Comments: |
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It's the same as stock traders/investors like me who borrow money to invest where the broker decides to up the margin requirements (allows less borrowing against particular stocks or funds or in general). This happens and traders/investors are aware of the possibility. Margin requirements for trading futures are much higher now than they were last year and in Australia many stocks have seen their marginability reduced. Nina's house now has reduced marginability, maybe it is not worth much less now, but it might be harder to sell if foreclosed on. And all the banks are trying to reduce their exposure to risk.
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Is that playing into the mortgage crisis at all? I took out a 2nd mortgage (actually a HELOC) to avoid paying PMI. I refinanced over a year ago, but I wonder what is happening to folks who still have them? Can the bank tell you that it's closing your line and that the balance is due immediately? Yikes!
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Man I bet they're on their mortgage broker's Christmas card list - sell them the loan (commission), convince them to put less down/borrow more so they can invest the rest of the cash (increased commission) refinance immediately (commission) adding on a HELOC (commission).
Maybe investing the cash instead of putting it down was the best plan for them, but I myself am reluctant to seek investment advice from mortgage salespeople. If my accountant said take a loan and invest the cash-on-hand then maybe I'd consider it, but not because my mortgage (car, real estate, mutual fund) salesperson said so. Maybe they ran it past an informed, unbiased party and just didn't mention it.
Of course their level of leverage would freak me right the heck out so I guess I'm just in a different risk tolerance class than they are and I'm looking at it from the wrong perspective.
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DCS: Nina put down 27% and never actually used the HELOC. She's actually wondering whether she should have put less down and used some of the HELOC. So she isn't over-levered by normal standards.
I'm not clear if she had to pay anything to set it up. This maybe why Citibank are reducing to $10,000 so they can't say they got rid of it and maybe she's angry she paid fees for it.
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an absolutely brilliant commentary. This is something that Ben Franklin would say were he living in 2008.
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It's the same as stock traders/investors like me who borrow money to invest where the broker decides to up the margin requirements (allows less borrowing against particular stocks or funds or in general). This happens and traders/investors are aware of the possibility. Margin requirements for trading futures are much higher now than they were last year and in Australia many stocks have seen their marginability reduced. Nina's house now has reduced marginability, maybe it is not worth much less now, but it might be harder to sell if foreclosed on. And all the banks are trying to reduce their exposure to risk.