Looking for New Home Equity? Local Banks Have Best Deals

They're baaack! Home equity lines of credit, or HELOCs--an early casualty of the housing bust--are growing in popularity again as cheap rates lure homeowners looking for funds to pay for student loans and home renovations, among other needs.

The key difference this time around is that many are turning to local lenders instead of the big banks.

Over the past two years, many banks made headlines by freezing HELOCs or lowering their amounts as home values plummeted. At the same time, tightened lending standards meant fewer people qualified for home equity lines than before. Many larger banks discontinued their HELOC programs completely.

Michael Destefan of River Edge, N.J., told The Star-Ledger that a big bank revoked his HELOC last summer after he refinanced his first mortgage. This year, Destefan, who owns a printing and marketing business called The Print Group, was able to get a new home equity line from Lakeland Bank, a small lender in Oak Ridge, N.J. The small business owner plans to use the funds to purchase printed items from China, including coffee mugs and tote bags. "We do promotional printing that appears in stores," Destefan said. "And sometimes these orders that we send to China require $50,000 up front. Customers won't pay for a product they won't see for a month, so we have to be able to wire China the money the next day, and now I have the flexibility to do that."

"I'm not surprised that you see some people moving those types of accounts to community banks, just because of the fallout that's occurred with what the larger banks did," Steve Bridges, executive director of legislative and regulatory affairs for the Community Bankers Association of Georgia (CBA), tells HousingWatch.com. "The community banks can give them more personalized service than a big bank." Bridges adds that local banks are less likely to freeze HELOCs based solely on an a

In February, a nonprofit group called A New Way Forward put up a web site urging HELOC borrowers and other financial customers to "break up" with their current banks and seek out local banks and credit unions to handle their credit requests. "It's time we stopped funding corrupt politics and end our abusive relationships with the four big banks," the site boldly proclaims.

There is some evidence to support this assessment. Earlier this year, a federal judge in San Francisco refused to dismiss a class action suit that accuses Chase Manhattan Bank of suspending borrowers' home equity lines based on an "inaccurate and mysterious formula" for determining home values. The lead plaintiff, Mary Yakas, filed the suit after her HELOC was suspended in late 2008 based on the assessment of Chase's Automated Valuation Model (AVM) that her home's declining value no longer supported her credit line, rather than on the opinion of a licensed appraiser.

CBA's Steve Bridges says that local banks are less likely than larger banks to freeze HELOCs or cancel them based solely on an automated value formula showing declining home values in their area. In addition, a local bank might offer borrowers in good standing some workable options. "I would doubt that in most instances a community bank would come in and just close a home equity account [in good standing]," he says. "They might instead inform the customer that they need to drop the collateral value, say, from $60,000 to $40,000."

Of course, there's no guarantee that a local bank will behave more ethically or have better rates. But the chances of a HELOC applicant getting more personalized service and an accurate property appraisal are more likely when the lending institution has roots in the community.

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