by footloose » Mon Jan 17, 2011 02:00:25 PM
Up until January 16, 2011 all HELOCS that were obtained through a bank were guaranteed by the Federal Government. That means, that if a borrower obtained a HELOC and subsequently defaulted on his payments, the Federal Government would reimburse the bank for its losses. It works the very same way as mortgage insurance. If you purchased a home with less than a 20% down payment, it is mandatory for you to have mortgage insurance usually through CMHC. If the mortgagor defaulted on his mortgage, the bank would foreclose on the property and sell it. Any shortfall on the sale price would be guaranteed by the Federal Government.
Initially, the intent of a HELOC was to provide a source of funds that a home owner could draw from to make renovations and improvements to his home at a reasonable cost. However, like everything else, the purpose of a HELOC has now been abused. Thousands of consumers are buying furniture, appliances, computers, HD TVs vacations and many other items with a high-interest credit card only to find that they are having problems trying to meet the minimum payments each month.
SOLUTION Obtain a low-interest HELOC and pay off the high-interest credit cards The banks were quick to set up a HELOC because first, it was registered against the property making it a secured loan, and second, the HELOC was guaranteed by the Federal Government should the borrower default on his payments. Now, as of January 17, 2011, the Federal Government will no longer guarantee the payments of a defaulted HELOC.
What this now means is that the banks are going to be more cautious as to who they accept for a HELOC as they are now on the hook for all losses. Expect to see a closer scrutiney of credit reports with any negative items or comments perhaps being the "deal-breaker" in obtaining a HELOC. Also, a good or excellent credit score will become more important than ever before.