The HELOC Bust: Next Problem for Big Banks?

Say it ain't so. If a prediction from a leading research firm turns out to be accurate, three of the country's biggest banks are poised for colossal losses of up to $30 billion -- this time because of their exposure to home-equity loans.

The research firm, CreditSights Inc., says that Bank of America, Wells Fargo and JPMorgan Chase -- the three biggest U.S. consumer banks -- are particularly vulnerable to "changes in the consumer cycle," reports Britain's Telegraph. And HELOCs, as the home-equity loans are known, are shaping up to be the next problem area in housing.

In the last quarter of 2009, late payments on home-equity loans hit record highs, according to the American Bankers Association. The loans, typically taken out on top of a primary mortgage, are a source of dispute among lenders and those who advocate reducing mortgage principal to stem foreclosures -- and the subject of a Congressional hearing being held today. Second loan holders are forced to take a loss when the first mortgage loan is modified, which they are loathe to do.
JPMorgan Chase CEO Jamie Dimon, says Bloomberg, told investors in the bank's annual report in February that quarterly writedowns in home-equity lending "could reach $1.4 billion" this year. But CreditSights believes the HELOC problem could be so bad that the three banks could see their 2010 profits -- estimated at $30 billion -- completely wiped out, the Telegraph reported.

CreditSights, by the way, reputedly predicted the housing downturn back in 2006, so people are taking notice of its latest warning.

In an interview with Bloomberg, CreditSights' senior bank analyst Baylor Lancaster said: "While a lot of people are looking for dramatic improvement in the short term, one area that still has to be worked through in a material way is home equity." The writedowns from HELOCs are not likely to show up in earnings reports until later this year, Lancaster said.

Together with Citigroup the banks hold about 42 percent of the $1.1 trillion in second-home liens. Unlike first mortgages, they are typically not bundled and sold off to investors but kept on the banks' books. The biggest home-equity lender in the U.S. is Bank of America, holding some $138 billion in such loans. Wells Fargo has about $123.8 billion of home-equity loans.

Charles Feldman is a journalist, media consultant and co-author of the book, "No Time To Think-The Menace of Media Speed and the 24-hour New Cycle." He has written about real estate related issues for several years.
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