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Real Estate Subprime Meltdown: What about HELOCs?

Russ H

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Just curious: Where do HELOCs (Home Equity Lines of Credit) fit in to the whole subprime/mortgage co bankrupcy situation?

If we have a few HELOCs with unused balances, do we need to be concerned that they might be pulled back? (e.g., $300K HELOC, only $130K used, $170K balance still avail).

Financing our RE development w/HELOCs on our appreciated (finished) properties is a key element of our overall PLAN, so if anything happened to the HELOCs we have gotten, we'd be in a bit of a pickle. :smx8:

Any mortgage brokers or other experienced loan folks out there willing to comment?

Thanks,

-Russ H.
 

tbsells

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Russ,
Most of these subprime lenders that are gone were not doing HELOC's. Unless your HELOC is at prime + 7% and you paid 5 points to close it, you don't have anything to worry about. From reading your posts here and at RD I know you're smarter than that. Most of these companies were real bottom feeders. You wouldn't do business on their terms. Your typical HELOC at a local or regional bank is unaffected by this "subprime" mess. I'd contact the institution to make sure, but I doubt you have anything to worry about.
 

randallg99

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Aug 9, 2007
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tsbells has it right.... unless your lender is a goner then there is not much to worry about because (from my experience) what jeapordizes the line availibilty is credit worthiness....

Now, that is not to say that a regional bank may be attuned to market conditions and can adjust lines to fit market values... only your terms and conditions (remember that fine print when you signed the dotted line? heh) will uncover the answer...
 

Russ H

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Thanks for the replies. :thankyousign:

I have to admit, we've read an awful lot of fine print over the past few years, and it alls starts to run together.

When we review contracts, we primarily look for "OH NOs" (any parts of the agreement that we either cannot work with, or could be problematic).

And we don't recall any of the HELOC agreements having OH-NOs.

But since the market is changing, the rules sometimes wind up changing, too.

So that's why I asked. :)

-Russ H.
 

Adam

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Aug 12, 2007
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Like others have said, you are ok with your current HELOCs. However, most HELOCs have 10 yr draw periods, if any of your draw periods are about to expire, I would be concerned. Also, it is much tougher to qualify for new HELOCs.

The subprime "meltdown" has effected the secondary market as a whole. There is a severe lack of liquidity in the secondary market right now. All of the lenders have pulled programs (mostly Alt-A) and second lien programs have disappeared. The investors have become adverse to any loan that is "unconventional" ie- 2nd mortgages, reduced doc, high-LTV, jumbo, etc. Also, many 2nd mortgage companies have stopped originating (or closed their doors). ie- National City, Home Equity of America, etc.

Now, this can't last forever, but it also will never go back to the way that it used to be. The mortgage industry is in a standstill and will be for at least another 6 months or more. Companies like IndyMac have announced that they are going to start re-introducing Alt-A programs, which is a good sign. However, those that were heavily relying upon stated income non-owner occupied loans and HELOCs on investment properties, are going to have a hard time qualifying for these loans from here on out.

I could be wrong, but only time will tell.
 

Poudda

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Sep 7, 2007
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Given the terms I see above ($300K HELOC, only $130K used, $170K balance still avail), you probably don't have anything to worry about. The bank may want to reduce the limit if the housing market tanks in your area but that would be an extreme case. It really depends on your bank and how they operate. They may be laughing about the meltdown because they didn't get into the sub-prime market and had no interest in selling their loans as packages to the secondary market. I'm in collections at my bank and I haven't seen any major problems, even though we do have a handful of sub-prime loans. Then again, I'm in the Great White North so our exposure is limited. Only a couple of Canadian corporations have been affected.
 

Adam

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Ok, I was wrong. Below is an excerpt from an email that I just received. This would definitely scare me if I was utilizing my HELOCs on a regular basis.


_________________________________________
Subject: Chase HELOC

Just a heads up, Chase is re-evaluating properties at their discretion and lowering/suspending credit lines. I just received a call from a client who closed 6 mos ago on an 80K loan ($430,000.00 appraisal, 80% TLTV), used 20K, is just finishing up a kitchen remodel and received a letter stating he no longer has access to any more money because they did an AVM and it came to $278,000.00. He called Chase and was told he would have to get another appraisal at his expense and they may reconsider. Do you think he is just a little angry???
I called Paul Xxxxxxxxx at Chase, he had just heard a day or so ago they are doing this. He is trying to get some answers, but WOW!
Talk about a bad move! So, be prepared if you have done much with Chase recently.


__________________________________________________
 

andviv

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I got this from a newsletter I subscribe to....

I received something in the mail this past week that I have never seen before. It was a letter from one of the mortgage companies I use notifying me that my equity line would be frozen temporarily - meaning I could not pull any additional funds from my line.

I have never received a letter like this! This letter was not singling me out - it was sent to everyone that has an equity line.

What would you do if you could no longer use one of your equity lines? Or two of your equity lines? Or all of them?

I've been asking people this question since I received the letter and there are two clear groups of people. Group 1 is the group that can deal with it. Group 2 is the group that doesn't want to think that it can happen - I can tell Group 2 immediately begins to worry about how they will cover the negative cash flow on their rental properties or how they will make payroll that month.

What do you think is different about the groups? It’s easy to conclude that Group 1 simply has more net worth or more net cash flow than Group 2, but that's not the case. Both groups are mixed. What's different is that Group 1 has clearly thought through this scenario already - not necessarily the mortgage company freezing a credit line - but about being in a tough spot - like losing access to source of cash; and they already know their plan on how to cover the difference.

Which group are you in? Everyone needs to be in Group 1! If you aren't in Group 1 - what can you do differently to get there?

Now, about 3 weeks ago I received a letter from this same mortgage company, and it was also a letter I had never seen before. That time it was an offer to take $5,000 off my $100,000 equity line balance if I paid my equity line in full in 30 days.

Would you take this offer?

For me, the offer didn't work with my wealth strategy, but for others it could be a great deal and a key part of their wealth strategy.
Comments?
 

Adam

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Not surprising, the secondary market HATES 2nd liens right now. No one is buying them.

We never use residential RE backed lines of credit for operating. Issues like this can shut you down.

Now, IF I was going to use a HELOC for my business and IF my business was going to be jeopordized by its termination, I would fully extend the line immediately. I would then put the cash into a liquid interest bearing investment account (ING Acct) and make the monthly payment on the HELOC. If you are paying P+1 (8.75%) on your HELOC, you can easily find an ING acct paying 5%. Now, remember, your HELOC is a simple interest account and your ING account is compound, so your effective rate is less than the 375 basis point spread. And, its even less if the line is on your primary residence and you can benefit from the tax advantage AND you can pay yourself interest as you will be loaning money to your company.

Is 375 bps a high cost to have funds available? Absolutely not, especially when it allows you to remain liquid and keep your business alive.
 

Diane Kennedy

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We always put HELOCs on our properties so we have access to cash if something comes up.

Indymac just cut off one of our HELOCs this week. Property was in San Diego, but we bought pretty low, so the property hasn't devalued that much. Interestingly enough, though, we'd already drawn on that HELOC. (letter was - you still need to pay, but we don't need to give you any more money on the loan)

I heard about a couple other people getting those letters in Phoenix this week - but I'm not sure which lenders. One person got a "settlement offer" - if you pay off the roughly $100,000 balance today, we'll give you $5K off.

These are NOT subprime loans.
 

Russ H

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Oy.

I hate it when something I worry about actually starts happening.

-Russ H.
 

andviv

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Yeah, I know... this actually affects greatly my plan... so it seems I need to go back to the board and start analyzing this thing again....

Adam, I like your suggestion, rep++ (I like your mindset... proposing solutions is a hard-to-find treat). I will consider it in my plan.
 

andviv

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Oy.

I hate it when something I worry about actually starts happening.

-Russ H.
Russ, I'm sure you have planned for this already.... so, how's looking for you with this new twist in the game? I assume that now money just became a little bit more expensive for everybody.
 

AroundTheWorld

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I second Adam's move. Max them out while you can. I would put a tweek in the plan though.... Invest with a hard money lender you trust at 12 to 14.... forget ING at 5.

Now, IF I was going to use a HELOC for my business and IF my business was going to be jeopordized by its termination, I would fully extend the line immediately. I would then put the cash into a liquid interest bearing investment account (ING Acct) and make the monthly payment on the HELOC. If you are paying P+1 (8.75%) on your HELOC, you can easily find an ING acct paying 5%. Now, remember, your HELOC is a simple interest account and your ING account is compound, so your effective rate is less than the 375 basis point spread. And, its even less if the line is on your primary residence and you can benefit from the tax advantage AND you can pay yourself interest as you will be loaning money to your company.

Is 375 bps a high cost to have funds available? Absolutely not, especially when it allows you to remain liquid and keep your business alive.
 

Russ H

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Great ideas here.

To answer you, andviv, no, we do NOT have a Plan B yet. We haven't had a call from our HELOC companies yet, but if we did, we'd get caught with our pants down (not something I like, in business).

That was my reason for posting.

We have about $2M in equity on one of our properties, which we need to refi anyway (it was a 5 year fixed that we got in '03). So part of what we need will come from there.

Any other ideas are welcomed-- but I like the cash out/CD suggestion (hard money lending is great, but it lacks liquidity for us, since we're using these funds to pay contractors).

-Russ H.
 

AroundTheWorld

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(hard money lending is great, but it lacks liquidity for us, since we're using these funds to pay contractors).

-Russ H.
Depending on the time frame - some of them will work w/ you if you give notice.
 

AroundTheWorld

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Here is another idea.

Create a note on the property yourself (with a different co.... maybe form a partnership (llc) w/ a trusted associate and start your own "bank".) After any notes there are seasoned you can sell the notes at a discount when you are ready for the cash.
 
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AroundTheWorld

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and yet another idea...

start building your biz. credit score. You likely won't get as much $ as you have available in a HELOC - but it's something.

www.creditboards.com has a pretty good biz credit board.
 

andviv

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I haven't done this yet, but I think I will, go to your bank and open a personal LOC. Your credit is great, you have assets, and have an established relationship with the bank... so go ask. I do recall getting offers with higher interest rates, but I rather pay more in interest than seen my projects suffer too much for lack of liquidity.
 

andviv

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forgot to mention, this is to be done in hand with the business LOC, so you open both, the business line of credit AND a personal loan.
 

phlgirl

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Thanks for bringing this back to the surface, Andviv.

I got my first letter yesterday! It is from BOA and stated that they had done an analysis on one of our investment properties and determined that it's value had decreased, since the time of financing (approx 10 months ago) and were therefore freezing our HELOC.

We have 20+ of these BOA HELOC products on as many investment properties (we treat them like 25 year mortgages since they have no closing costs) and, so far, this is the only letter we have received.

Does not really effect us, as we had no intention of drawing further on the line - our goal is to pay them off - but I did find it interesting.
 

jimculler

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I guess they must have reserved the right to revoke the HELOC at any time for any/no reason.

Still stinks to give someone a line, and then come back and freeze it on them when they need it. Of course if we want lenders to stay in business, I guess we all have to be inconvenienced for a while.
 

traderjphx

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Just got a letter this week from INDYMAC. House is in Gilbert, AZ, a suburb of Phoenix. I have a 1st with them, but this is for the HELOC on the house. They suspended it based on "the value of the dwelling has declined significantly below its appraised value used at origination". This is all getting very interesting.
 

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