If you are one of the hundreds of thousands of people who have a HELOC (Home Equity Line of Credit,) you may have already discovered (much to your dismay) that the funds in the account are no longer accessible to you. The account was summarily suspended by the lender without prior notice. If, per chance, you wrote a check on the account and paid other expenses from that withdrawal, you may also have found that those checks bounced or at least were sent back by the lender as "unable to be honored."

Often that line of credit is there as a cushion or hedge against unforeseen expenses or emergencies. Yikes, how could that security blanket be taken away in an instant when the account was paid on time and in good standing? (This article has nothing to do with accounts that are delinquent and canceled as a result of that circumstance.) How could a bank place you the homeowner in the dubious position of writing what amounts to bad checks (that's fraud) albeit without your knowledge?

Well, they can and they are!

Having been one of the walking wounded placed in this precise situation, it occurred to me to do some homework and find out who else may be feeling the pain, how is it possible and how prevalent is the situation?

Survey says that bank after bank is opting out of the HELOC business, if only for the next 24, or so, months until they can reevaluate the market or cutting back substantially on the number of accounts on the books. This is another side effect of the banking/real estate troubles we know all too well.

The long and short of how it is being justified is simple. The bank utilizes a computer model, a so-called "proven automated valuation method," to estimate the home's value. If they find that the valuation does not support the amount of the loan's face value, they suspend the line of credit.

For example, Chase uses the services of Trans Union (they are more than a credit reporting service) to determine the value of their properties. It is important to note that a suspension is not equal to the closing of the account. If you want to remove the lien, you must contact your bank and officially close the account. It is wise to do so, as the bank will most likely not reevaluate the value of the home for 24+ months. Why keep the account open when it is, for all intents and purposes, void?

This process begs a couple of questions:

1. What if the owner already has some of the loan's balance owing? The bank will then freeze the balance of the equity line and the owner will continue to pay back the outstanding balance as agreed when the loan was made.

2. What ratios are used to determine the loan(s) to property value? In CT Chase is using 65%, and in NY they use 75%. Other banks are using similar ratios. In other words, if you have loans/liens, primary or otherwise, that total more than these percentages as a portion of the value of the home, your HELOC is subject to suspension. Example: The bank determines that your NY home is valued at $350,000; therefore your loans cannot exceed $262,500. If you have a mortgage of $200,000 and a HELOC of $80,000, you have exceeded the loan limits.

3. Is there an appeals process for the homeowner who does not agree with the bank's valuation? Yes, however the owner is asked to provide a formal appraisal (not broker price opinion) demonstrating the current market value. In all instances known, this is/was done at the owner's expense. The bank will determine its course of action upon review of the appraisal. The appraisal does not guarantee reinstatement of the loan or a portion of the loan, as the case may be.

4. How can the bank suspend the loan if checks are outstanding? Read the small print … . It is always about the small print! Somewhere in your loan agreement the bank states that the lender's rights include reduction or suspension of the loan anytime there is a question as to the value of the property. Protecting the bank's assets is of primary importance. Let's face it. If the bank were to send you a letter saying that as of one week from today we are suspending your HELOC account, it is my guess that there would be lots of folks taking out every cent before the fact.

   It is probably just too bad for you if the effective date of the suspension occurs before a check clears. While the bank has the option to honor or return checks received for payment after the suspension date (regardless of when checks were dated,) pretty much count on checks getting returned as not honored. Risking that you can remove funds immediately after the suspension notification is received and have the check clear is walking a very thin line.

5. What if your line of equity was not suspended to date and you want to write a check on the account prior to the bank possibly taking action to suspend the account? Remember that any check you write against your equity account becomes a loan that must be paid according to the terms of the agreement. If making the payments is not within your budget, then be wary of increasing your debt load, especially in challenging times.

   Only you know if taking out equity from your home is a wise move. Property values have decreased and often, due to present economic realities, the bank is correct in worrying that people will use their lines of equity for day-to-day living expenses. Consider what happens if and/or when the owner wants or needs to sell the property and finds he/she owes more than the home is worth. It is happening everywhere. Not only is the bank at risk, the owner is as well. This is not by any means a legal opinion. However, it begs the question that if an owner were to write a check against a property HELOC and for any reason it could be proven that the owner knew the equity in the home was not there to support the added lien, the bank may have recourse against the owner for some kind of deception or fraud… Just food for thought!

It is truly a sign of the times that we are worrying about issues that would never have even been contemplated four years ago. Back then, we were not paying $4.50 a gallon for gas, cutting coupons daily, cutting back on lattes nor having "stay-cations" versus vacations… Back then, it was Camelot. So, if you were counting on that HELOC as your security blanket, you may want to reconsider and go out and get a teddy bear.