In addition , many older homeowners have lost their job during the virus , and their largest retirement asset , by far , is their home equity from which they can draw upon . These same homeowners not only may not qualify for a HELOC [ Home Equity Line of Credit ], they may not want them after considering the benefits of a reverse mortgage ( HECM ) vs . a HELOC . For one , HELOCs require monthly mortgage payments . In addition , unlike a reverse mortgage ( HECM ), the bank can freeze [ or reduce ] the HELOC line and not allow access to it . This puts the homeowner in a precarious position of having debt against their property [ as the HELOC is recorded against the property for the maximum potential draw of the line ] without any benefit . Such was the
" During The Great Recession , banks were facing write downs and write offs of loans as the loans that they had previously written took a downturn when borrowers , during the credit crisis , were unable to pay their mortgage ."
case during The Great Recession in the midlate 2000s when $ 6 billion of HELOC credit was frozen in June of 2008 , and the freezing continued for some time . Why ? The answer lies in the fact that the fastest way for a bank to shore up its balance sheet is to freeze HELOCs , so they do not have to set aside reserves . During The Great Recession , banks were facing write downs and write offs of loans as the loans that they had previously written took a downturn when borrowers , during the credit crisis , were unable to pay their mortgage . When a bank makes loans , they use depositors ’ funds . The government requires reserves [ loan loss reserves ] be set aside to ensure the return of those depositors ’ funds . If a bank has existing loans outstanding , they cannot just call in those loans [ unless borrowers default ]; however , a HELOC is a “ potential loan ” as the loan technically only exists as the borrower draws upon it . In this situation , if they freeze [ or reduce ] the line , the bank has not lent the money yet and can stop it before the borrower accesses the money that was available to them .
Image by fernando zhiminaicela from Pixabay
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