Recently we wrote about Chase’s approach to getting rid of it’s WAMU Home Equity Lines of Credit (HELOCs).  This is not much different than what banks are doing to their credit card customers.  (See yesterday’s blog post.)  Basically, banks have now decided that their interests in lending are no longer aligned with their customers’ interests in borrowing.  Not a good situation if you are the borrower.  Because banks are throwing all these curve balls, we are trying to keep up with them and keep our community aware of what’s going on.  Hopefully, armed with this information consumers can plan accordingly.

Here is what we found out about how Chase is handling its HELOC customers.  If Chase decides the price of your house has dropped since getting your loan, they have been freezing and suspending lines of credit.  The equity in the home or your payment history is not being considered when making their determination.  The trigger is simply whether the home value has dropped since getting the loan.  There is no way to find out how many people are affected, but it seems this approach would include just about everybody.  For instance, let’s say you have a home that was worth $600,000 but is now worth $500,000 and have a $200,000 first mortgage and a $200,000 HELOC, because your value dropped they have frozen the line of credit and reduced the line to zero.  Even though you have $300,000 in equity they will not allow you to access your line of credit.

If you are stuck in this situation, Chase has laid out a path to unfreeze your HELOC.  They are putting the burden on the borrower to prove that the value of the house still supports the original loan.  If you pay several hundred dollars for an appraisal using their appraiser and the value of the house supports your loan on its original terms, our understanding is they will reinstate your loan.  (Better hope they don’t bring in your appraisal at $495,000.)  We are not sure of the full conditions for reinstatement.   But you also need to be aware that they may again suspend or freeze your credit line if they again deem it appropriate.

If their appraiser does not value the house at an amount sufficient to reinstate the loan in its entirety, they may offer to reduce the line of credit to an amount that would leave 40% equity in the home.  Using the situation above, if your home is appraised at $495,000 by their appraiser and your first mortgage is $200,000, your HELOC could be modified to $97,000 giving you a combined loan to value (CLTV) of 60%.

Previously, WAMU had lowered credit lines to about 65% of a very conservative valuation of the home.  Many of their HELOCs have 40% or 50% equity above the loan.  So it seems risk avoidance is not driving Chase’s decision.  What may be at issue are that many of the loans held by WAMU customers currently only pay 2.75% or 3% interest.  Chase is currently charging 4.5% to 5.75% for these same loans.  Chase is not forthcoming with its motivation, only saying they are within their rights.