From the Wall Street Journal:
Latest Trouble Spot for Banks: Souring Home-Equity Loans
Losses May Hit Lenders That Skirted Subprime; Surprise Delinquents
By ROBIN SIDEL
March 12, 2008; Page C1
Here comes another headache for banks suffering from the mortgage downturn: Losses on home-equity loans are soaring, even at some lenders that avoided big blunders on subprime loans.
When times were good, banks raked in billions of dollars in profit from home-equity loans, which allow borrowers to tap the accumulated value in their property with either a loan for a specific amount or a line of credit. As long as home prices were rising, lenders had little to worry about.
But 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.
Now, the steep decline in housing prices and weak economy are turning the home-equity business upside down. About 4.65% of fixed-rate home-equity loans were delinquent in the fourth quarter of 2007, up from 3.11% a year earlier, according to Equifax Inc. and Moody’s Economy.com.
“We will continue to see banks increasing reserves for their home-equity portfolios and tightening their home-equity policies, changing their credit standards in response to price declines,” said Doug Duncan, chief economist of the Mortgage Bankers Association.
Meanwhile, financial institutions are refusing to provide home-equity loans to homeowners whose residences are already weighed down by big mortgages in states like California and Florida where home values are falling fast.
“This product was meant to help people do construction on their house, [and] do debt consolidation — not to take out every last dollar of equity in their home to finance a different kind of lifestyle,” Mr. Scharf said. J.P. Morgan is “rolling our changes back to represent that kind of product.”