Home-equity loans bring major losses for Bank of America ...

Posted: Sunday, Jun. 19, 2011

Of all the mortgage woes at Bank of America, one of the less-publicized ones could turn into one of the most expensive: home-equity loans.

From the beginning of 2008 through the first quarter of this year, the Charlotte bank has racked up $18.5billion in home-equity loan losses, according to an analyst report last week. That was about 40 percent of the bank's $46billion in housing-related losses so far, and more than any other category.

By the end of 2013, the bank could post an additional $27billion in losses on housing-related issues for a total of about $73billion, according to the report. Of that, $24.8billion could come from home-equity loans, just shy of the $25.8billion that could come from investor requests to buy back soured home loans, a more high-profile issue.

"A tepid recovery in both employment and housing is keeping home equity on the table as a front-burner issue," Sanford C. Bernstein analyst John McDonald wrote in his report.

Home-equity loans or lines of credit are mortgages taken out on a property that are secondary to the first mortgage. As housing prices soared in the last decade, homeowners - often encouraged by banks - tapped their home equity as a way to finance renovations, vacations, credit card payments and other expenses.

Bank of America has been besieged by mortgage problems on multiple fronts, including high-profile regulatory investigations over foreclosure practices. Many of these struggles can be blamed on Countrywide Financial, the troubled lender the bank purchased in 2008.

But the home-equity losses are more of a homegrown issue. Of the bank's $133.6billion home equity portfolio, only $12.5billion in loans have Countrywide roots.

"Even without Countrywide, Bank of America was a big home-equity lender," said Guy Cecala, publisher of Inside Mortgage Finance, an industry publication based in Bethesda, Md. "Countrywide just made it bigger."

In early 2006, as the housing market was cresting, Bank of America trumpeted the fact that it approved more home-equity loans than any other bank, part of a three-year effort to boost volume. Later, when housing prices plunged, the bank was caught off guard by rising losses on home equity loans and credit cards, former chief executive Ken Lewis told the Financial Crisis Inquiry Commission last fall.

"That is a major disappointment for me that our consumer loan portfolio in those two areas performed as poorly as that," he said.

The underwater link

Out of $10.5trillion in home mortgage debt outstanding as of March 31, about $925billion was in the form of home-equity loans and lines of credit, according to Federal Reserve data. About three-quarters of those second mortgages were held by commercial banks such as Bank of America, Wells Fargo and JPMorgan Chase.

When the housing market crashed, first mortgages typically went into default faster than home-equity loans because second mortgages had smaller payments, Cecala said. Borrowers, though, are more likely to stop making second-mortgage payments, he said, as they realize their homes are under water, meaning they are worth less than the amount owed on the loan.

Declining home prices and home equity loans are two of the reasons borrowers are under water, according to a recent report by research firm CoreLogic. While 18 percent of borrowers with no home equity loans were under water at the end of the first quarter, 38 percent with home equity loans were in that position, the firm found.

Losses on home-equity loans will be less than first mortgages because first mortgages are a much bigger part of the market, Cecala said. But a difference for the banks is that first mortgages were typically packaged into securities and sold to investors, who will absorb much of those losses. Home-equity loans mostly stayed in banks' own loan portfolios.

In the first quarter, Bank of America charged off, or wrote off as uncollectable, $1.2billion in home-equity loans, an annualized ratio of 3.51 percent of average loans outstanding. In a positive trend, the bank's home-equity charge-offs have fallen over the past five quarters.

"We've got work to do to get that through the system," Bank of America chief executive Brian Moynihan said of home-equity loans at an investor conference last month.

Bank of America is not the only bank taking losses on home equity loans. In its "core" home equity portfolio, Wells Fargo took $926million in charge-offs in the first quarter, a ratio of 3.44 percent. In a $6.6billion home equity portfolio that Wells is liquidating, the ratio was 10 percent.

Overall, about 2 percent of Bank of America's $133.6billion in home-equity loans are considered nonperforming, meaning they are seriously delinquent. That compares to 7 percent of its $261.9billion in residential mortgages.

"The vast majority of our home-equity customers are making payments on time," Bank of America spokesman Bob Stickler said. "Even though some are under water, they're still making payments."

He declined to comment on McDonald's projections. How the economy performs will be a key factor in future performance, he said.

"If people have jobs, they can maintain their payments," he said. "To the extent employment does deteriorate you will have a different experience."

Modifying mortgages

Home-equity loans have been a complicating factor in modifying home loans, Cecala said. That's because the servicer of the first mortgage can have trouble winning the cooperation of the second mortgage lender, even if they're the same company. A second mortgage lender still receiving payments doesn't want to lose that income.

Bank of America spokesman Dan Frahm said the bank will modify eligible second mortgages whether it is the servicer of the first mortgage or not. Through its own programs, it has completed more than 100,000 loan modifications for home equity customers through a proprietary program. It also has completed 40 percent of the 25,000-plus modifications reported under a Treasury program, Frahm said.

A potential pitfall for Bank of America could be if a settlement with state attorneys general forces banks to reduce loan balances as part of loan modifications for underwater borrowers, analysts at research firm CreditSights wrote in a report last week.

If that happens, home-equity loans "could morph into a potentially bigger concern than" investor requests to buy back soured loans, the analysts wrote.

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Source: http://www.charlotteobserver.com/2011/06/19/2389757/home-equity-loans-bring-major.html

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