Your House Is Not an Emergency Fund

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I have a confession to make: I've never had an emergency fund.

I don't think that I'm immune to financial woes; I just figured I'd tap into my home equity line of credit at a relatively low interest rate, should I run into a financial disaster. Better to keep the cash earning a higher rate of return than stuck in a low-rate bank account, I figured.

That is, until my line of credit disappeared. Citigroup (NYSE: C) sent me a nice letter telling me that my line had been frozen because the bank believed that the value of my house had fallen. Yes, Fools, house prices really do go down-- and without that collateral, I have no line of credit.

I'd guess Citi isn't the only bank sending out these kinds of letters. Given the losses we've seen in recent months, it's not surprising that banks would want to limit the potential for homeowners to do further damage.

Company	Provision for Loan Losses in First Half of 2008	Increase Over Same Period in 2007
Washington Mutual (NYSE: WM)	$9.4 billion	1,455%
U.S. Bancorp (NYSE: USB)	$1.1 billion	194%
PNC Financial (NYSE: PNC)	$337 million	444%
Regions Financial (NYSE: RF)	$490 million	358%
KeyCorp (NYSE: KEY)	$834 million	760%
BB&T (NYSE: BBT)	$553 million	248%

Source: Capital IQ, a division of Standard & Poor's.

Fortunately for me, the letter didn't come during the middle of a personal financial crisis. Hopefully, I have time to get that three to six months of expenses stocked away somewhere safe.

I've never used the unrealized gains in my house as a bank account for frivolous spending. But that letter made me realize that I can't count on those unrealized gains in an emergency, either.

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• It's so much worse than you think.