Home Equity Loans Become Next Casualty in Credit Crisis

Another side effect of the current U.S. housing crisis is the tightening of the home equity market.

As the value of homes continues falling, people have seen the equity in their homes wiped out.

In response, lenders are putting more restrictions on home equity loans, often by simply freezing loans and lines of credit, leaving millions of Americans in the lurch.

For decades, owning a home has not just been a measure of achievement, it has also been a measure of net worth. When home prices were ballooning Americans took out a record $1.1 trillion in home equity loans, turning their homes into their personal A.T.M. machines.


"Now with housing prices dropping so dramatically at these unprecedented levels, we are actually seeing banks tightening up and its hurting people in ways they never thought they would be hurt before," explained Wendy Bounds, a columnist at the Wall Street Journal and a "Good Morning America" contributor.

Many loans are now greater than the value of the homes, and that is causing leary lenders to re-evaluate and in some cases cut lines of credit.

Homeowner Lynette Madden has always paid her bills on time and has barely tapped into the home equity line of credit she was granted on her home. Then, last month, she got a surprise letter from her lender telling her that her line of credit had been abruptly cut off.

"I was shocked. I was amazed that they could actually do this. And what if I had actually tapped into my full line of credit?" said Madden.

Madden's lender, Countrywide Financial, says on its Web site that the practice is in keeping with regulation established by the Federal Reserve Board that says lenders can freeze loans if "the value of the dwelling that secures the plan declines significantly below the dwelling's appraised value." Click here to read Countrywide's statement.

What You Can Do

If you're in Madden's situation, here are some tips for what you can do:

If you think you still have enough equity in your home to cover your line of credit, you need to appeal with your mortgage company.

You can also get your home reappraised to clarify its value, even though this will cost you approximately $300-400.

Do not continue to use your line of credit until you clearly understand your standing.

Click here to get advice from the Federal Reserve on what you should know about home equity loans.