Wow! I truthfully never thought I would see a story about lenders walking away from home equity loans [subscription required] rather than foreclosing on the home, but the Wall Street Journal reports that several banks are doing just that. Instead of foreclosing the home, mortgage companies which provided borrowers with equity lines or second mortgages on the property are walking away, writing off the loss and just leaving a lien on the property with the hope that some day in the future, when the house is sold or the owners want to refinance, they'll get their money.

Lenders that told the Journal they were writing off the loan rather than foreclosing include Bank of America (NYSE: BAC), Countrywide (NYSE: CFC) and Washington Mutual (NYSE: WM). Why would they just walk away? With home prices dropping, even if they did foreclose, they probably wouldn't get much or any money out of it anyway. Many of these homeowners owe more on the house than its worth. Only lenders with the first mortgage are likely to get any money by forcing a foreclosure.

Moody's estimates that losses on home-equity loans outstanding as of June 30, 2007 could ultimately total $58 billion on top of the $278 billion in losses on mortgages. "You can make a horrible decision by choosing to foreclose, " Steve Baily, a senior managing director with Countrywide, told the Journal.

In a related move, lenders are starting to reduce the amount of credit available on existing home equity lines if they see signs of trouble on the homeowner's credit report. Most banks do have provisions in their equity line agreements to reduce the available credit on the equity loan if the credit report indicates the borrowers are having trouble paying their bills. For example, Citigroup (NYSE: C) told the Journal that "under the borrower's credit agreement, it is permitted to freeze home-equity advances or reduce credit limits if the home's value has declined below the original appraisal, or if it reasonably believes the borrower won't be able to make the required payment."

If you are having trouble meeting your bills, don't be surprised if the available credit on your home equity line is reduced, or your ability to write more checks based on your available credit is frozen. Banks are starting to audit home values and reducing credit lines if there isn't enough equity left in the home. Washington Mutual told the Journal that it notified 3,200 customers with home-equity lines that it would reduce the amount they could borrow against those lines.

Banks are acting defensively to try to minimize their losses and stop the bleeding on their balance sheets. It's about time. It will be a hard pill to swallow if your equity line is frozen, but it's a necessary medicine for all who get it. If your equity line is frozen, or your allowable credit line lowered, you're in over your head and it's time to rethink what you're doing financially.

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If Chase does not come through with an affordable loan for us, what are our chances of being able to refinance our home w/o knowing what it is worth - I know we are now upside down in our home. I was told by an appraiser that all the homes in my neighborhood have either been sold through a short sale or foreclosure.