Credit Crunch and Home Equity Lines of Credit (HELOCs)

Yesterday, I spent a considerable amount of time talking to clients who were concerned about the critical economic situation on Wall Street which is being debated on Capitol Hill and in the press. From practical experience and listening to the news coverage, the only thing that appears to be a safe statement is that NO ONE truly knows what is going on or the real extent of this crisis. Clearly there is plenty of blame to go around. However, it appears that a few changes here, a few changes there in addition to either the failure of or lack of regulation got us to where we are right now. And, of course, we can't leave out the greed factor here.

Many people are clearly upset that quite a few Wall Street executives have pocketed multiple millions of dollars in the last few years, and they do not want to further enrich these people. This is VERY understandable. It appears that one of the biggest issues here is that the people on "Main Street" want to make sure that the Wall Street people get their heads handed to them on a platter. However, in trying to do so, the average American may end up being the ultimate loser. And that would be very sad indeed.

The complexities of this situation are well beyond the abilities of any one person to solve and, most likely, the abilities of our elected officials. Most of them just do not have the complex financial background that this situation requires. The news reports indicate that none of the individual Senators or Representatives have actually seen any proposed legislation.

I know that when new tax legislation is released, it is usually several inches thick and is almost unreadable. In many cases, the presence of a single "and" or "or" can make the difference in the entire slant of the law. It normally takes many months and sometimes years and "technical corrections acts" to figure out the real impact of certain provisions that passed. For example, the Roth IRA legislation was passed about 10 years ago. While I immediately saw the benefits of this provision, I sat through many tax continuing education programs where CPAs could find no benefit to doing a Roth IRA. It is only in recent years that most financial advisers agree on this concept.

We are getting the message that this legislation must be passed IMMEDIATELY so that the financial markets do not collapse. So, if and when some type of legislation passes, we can be assured of two things: that SOMETHING was done and that it will take a long time to sort out the real implications of the legislative action. In the meantime, there is the very real possibility that the markets can freeze up entirely if nothing is not done or the right legislation is not enacted.

So - what should you do? The thought of not being able to use your credit card is pretty scary to some people. Right now a number of banks have actually decreased the amount of available credit to a number of their card holders. How would you feel if you needed some gas to get to work and the ATM did not spit out the $50 to $100 you needed to fill up your tank. Just think about it for a minute. But, suddenly, that is a real possibility here.

Yesterday I talked to a client who was concerned about the home equity lines of credit he has on a couple of his houses. He regularly uses these lines of credit to finance his business. He wanted advice on whether or not to take the money out now or wait. He did not want to withdraw the money and pay the interest on the funds sitting in a bank account which may never be used. I asked him what would happen if the bank froze his line of credit. He said that he would be out of business as many of his assets are either tied up in inventory, real estate or collectibles.

We spent quite a while discussing his situation. Another piece of this puzzle that factors in here is that the bank froze his line of credit last fall when home prices started falling. The bank wanted to determine if there was still enough equity in his home to continue to lend him the money. The equity in your home is the difference between the fair market value of your house (what you can sell it for) and the amount of the mortgages outstanding on your house. In other words, this is the portion of the house that you actually own. In many cases, people no longer have any equity left in their homes, and the amount of the mortgages exceeds the value of the homes. When the equity shrinks, the bank will close down your line of credit.

I asked my client how much warning he had been given when the bank froze his line of credit. He said he had no notice whatsoever. In fact, he even had written a check on his line of credit that had not cleared when the bank froze the credit line. The check was held up for a number of days while the bank performed its analysis. Luckily for my client, the bank honored the check and left his line of credit intact. However, many people have had their lines of credit decreased or closed down without any warning. This practice has been going on for about a year.

Another client of mine has a situation where where he has a home equity line and his spouse needs the money to pay for her long term care. If the home equity line is not available, the spouse could potentially be turned out on the street.

So, take a good look at your own situation and try and determine your needs in the immediate future and maybe even for a couple of years. We do not know how long this crisis will take to straighten out. If you will need the money from your line of credit in order to function, you may need to withdraw it now and stash it in some type of savings. But everyone is different, and there is no "one size fits all" answer.

Real Estate Tax Payments

Between July 1 and December 31, real estate taxes are due for many jurisdictions. The great majority of homeowners with mortgages escrow their real estate taxes. Quite a few just automatically make that monthly payment which includes principal, interest, taxes and insurance. They do not really take the time to check and see if the bank or mortgage company actually made the tax payment to the local taxing authorities.

With all of the recent bank failures, it might be a good idea to check and see if your mortgage company actually paid the real estate tax bill. Mortgages are being transferred quite more frequently lately, and with all of the turmoil in the financial markets, you want to make sure that your real estate tax bill does not get overlooked. Last year a few companies went out of business without forwarding the monthly escrow payments on to the tax authorities. And this was before the real financial crisis hit!

Many counties have a web site where you can actually check to see if the bill has been paid. It might be worth your while to print out the bill showing that the taxes have actually been credited to your account. If the taxes have not been paid promptly, contact your mortgage company promptly. You are still responsible for the payment of the taxes even if the bank fails to pay them.

This Is Scary - IndyMac Bank Failure

This morning I woke up to the news of the failure of IndyMac Bank. One news article said that the assets of the bank were "seized" by the FDIC. Bank depositors have very limited access to their funds over this weekend. They are limited to what they can get through an ATM card. Just think - this would not be the weekend to have the ATM "eat" your bank card.

This is the second largest bank failure in U.S. history. Some 10,000 depositors had funds in IndyMac in excess of the insured limit of $100,000 for a total of $1 BILLION. According to an FDIC statement, funds deposited in IRAs were separately insured up to $250,000.

The failure of IndyMac should serve as a sign for everyone to step back and take a good hard look at the safety of their assets. It has been a long time since the insured limit of $100,000 was set. Many years ago, the $100,000 limit seemed unattainable to many people. Right now, I have many clients who routinely keep a higher balance than that in their checking account. It is not at all unusual for someone to have more than $250,000 in an IRA in this day and age.

The days of the bank failures are pretty much in the distant past in the days of the "Great Depression" in most of our minds. However, with the recent news stories about the struggles of Fannie Mae and Freddie Mac, the collapse of the housing market and now the failure of IndyMac, I think this is a wake up call to all of us.

Please call me if you need some ideas on how to possibly safeguard your money. We can look at your specific individual situation to see what will work for you.

E-mail Alert of the Day

Recently, I signed up for emergency alerts which are delivered by e-mail so that I could keep up with the extreme bad weather and traffic in the local area. In the Washington, DC area, the weather seems to have been changing in the last few years and producing numerous tornadoes which never used to be commonplace. It is also not unusual for an accident to tie up the beltway for many hours at a time. Lately, there have been emergency alerts relating to breaking water pipes and the necessity to boil water. Every day seems to bring another new disaster.

I was surprised though when I did receive the following e-mail alert yesterday morning:

“Severe traffic disruptions at Lee Hwy/Union Mill Rd at the Shell Gas Station due to a gas giveaway from 7 a.m until 9 a.m”