We sat down with a client the other day for their annual review and noticed they had closed their home equity line of credit.
It turns out that the decision to do so was more Citibank’s than theirs.
Citibank unilaterally reduced their $190,000 line down to $10,000 (less than their Citibank credit card) yet kept all the same annual fees in place.
Most agreements allow an issuer to reduce a line of credit if your credit goes south or if your house goes substantially down in value. In our client’s case, neither of these applied.
So why did Citibank do this?
All the banks are feeling pain from losses they are experiencing from home equity loans. In the olden days (i.e. a couple of years ago), hardly anyone defaulted on a home equity loan. If they got in trouble, most people just sold their house at a profit and paid off all the loans. Home equity lines also weren’t given out like candy. Most people who got them actually used them for fixing up their homes. It turns out that the clientale you attract by pitching the virtues of debt consolidation are not the most likely to pay you back if the going gets even slightly rough.
The banks with big portfolios of home equity loans are getting hit two ways. First, they are losing money. Second, the market is hammering them because of concerns about future losses (exhibit A: E*TRADE, exhibit B: Citibank) . It shouldn’t really be a surprise then to see the banks aggressively trying to get rid of any outstanding lines. Batten down the hatches!
From what we have seen, the banks seem to be yanking even lines that they have no right to yank- kinda like the insurance companies that reject all claims the first time they are submitted.
What should you do?
First of all, you make sure that your financial plan does not presume the availability of a line of credit. Everybody needs some cash.
If you know you will need money from your line of credit soon (an imminently approaching house remodel), you should consider drawing down the money NOW.
Finally, if you are in a fighting mood, you probably can challenge some of these credit line reductions. If you successfully do so, drop us a line (firstname.lastname@example.org) – this applies even to people who are not our clients. We will raise a fuss if we see a pattern of banks systematically stepping over the line.
So what did our client do? They are busy so they just closed the line completely. Citibank then had the gall to try and charge them a fee for doing so!
As always, everyone’s situation differs and you should do your own homework or consult your own advisor.
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