The Next Trouble Spot: Banks Hit by Home-Equity Losses
Although some lenders avoided big mistakes on sub-prime loans, losses on home-equity loans are on the rise. Banks raked in billions of dollars in profit from home-equity loans during good times. Borrowers can tap into the accumulated value in their property with either a loan for a specific amount or a line of credit and, as long as home prices were rising, lenders had little to worry about. However, now falling home values are leaving banks with little or nothing to collect on many home-equity loans in case of default. Some stretched borrowers are keeping up with their mortgage and credit cards -- but not their home-equity loan.
The problems are already causing trouble for J.P. Morgan Chase & Co. and Wells Fargo & Co., and are expected to hit other large banks when first-quarter earnings results are released next month. The pain is likely to deepen through the rest of 2008, sapping capital levels and resulting in tighter lending standards as banks try to reduce their risk.
"These losses are well beyond what we would have modeled...and continue to get worse," said Charles Scharf, head of J.P. Morgan's retail business.
Fitch Ratings, a unit of Fimalac SA of Paris, predicts that "banks will significantly ratchet up loan-loss provisions against home-equity loans in 2008."
Projected losses from home-equity loans aren't anywhere close in size to the carnage caused by the declining value of mortgage-related securities. (Those losses now total more than $150 billion.) But the cascading delinquencies and charge-offs represent one more piece of the U.S. banking industry that is in big trouble after years of bumper-crop profits.
Published on March 12, 2008
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