A 9 year home equity line of credit is acquired in 2006 for 90-100% LTV against a residence appraised at $100,000.00.

4 years later the real estate market declines severely to the point where the home is now appriased at only $50,000.00. Can the lender decrease the loan limits? How about force the borrower to come up with more collateral?

Would the scenario differ if the borrower had a balance on the HELOC or if it was just sitting there for emergencies with a $0.00 balance.

Thanks for your help...I've always wondered about this question.

That's a very good question. This is my take on this but I'd like to hear what others have to say as well.

Lenders' appraisals of a subject property are done when people intend to buy the home, refinance a home, or intend on securing a 2nd mortage such as a heloc or home equity line of credit.

The appraised value of the subject property AT THE TIME OF THE APPLICATION is one amongst many other factors that will dictate whether or not someone will get an approval for the loan.

As long as the borrowers remain in good standing in regards to the repayment of the loan, lenders will not require a new appraisal just because the market has declined. However, if after 4 years, the borrower wanted to sell or refinance his 1st and 2nd mortgage using the new value of $50,000, then yes that could be a major problem.

I'm not buyin' it....There is no way to justify that level of depreciation to that residence due to the market anywhere in a four year period, especially within the last 4 years. There has to be more to this story.

As far as the HELOC, Alea is right on the money.

AZLender,

I was just trying to provide a theoretical situation. To make it more realistic, let's say homeowner took out a 95% LTV HELOC and the RE market tanks knocking off the home's market value by 15%, which now makes the home now worth less *if* appraised today (not saying it's going to be appraised).

Basically, I'm trying to learn if there is what's equivalent to a "margin call", in stock market terms, or "due on sale" clause within the realm of HELOCs with regards to the subject home suffering a loss in value from the instant that the HELOC is granted.

Okay, that makes sense. To answer your question. If we were looking at a HELOC approved to 95% CLTV on the original appraised value and the property depreciates over a period of time as long as the payments are made on time and the borrower remains in good standing, there is no reason for the lender to enforce their due on sale clause unless the house is sold. It would be then that the borrower would have to come up with the remaining balance over and above the sales price to ensure a clean title.

Or the short answer.....no.

However, it would be wise to think that a lender could have the ability to "freeze" a credit line if deemed necessary.

They do have that ability.

If you have an open equity line and keep it in good standing the lender will not even know the property value has declined. If the payments are made on time, paid off but not closed or a combination you have nothing to worry about. The lender is not going to look at that line again unless you give him cause to look..

Exactly.