Latest Bank Headache: Home Equity Loans

Wednesday, March 12, 2008 | 07:58 AM

>

"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."

-Charles Scharf, head of J.P. Morgan's retail business.

>

That is, in a short phrase, the reason that the US consumer is all spent out. They used debt and home equity -- as opposed to Income gains -- to finance an improving lifestyle. After the vacations are passed, the big screen TV and new cars become old, what are you left with?

Appreciation in the value of your home has long been considered a form of forced savings. (As in don't eat your seed corn). The economic boost is over, the savings impact is significant, and you are left with a financial hangover. Talk about a negative wealth effect.

For the banks, it raises all different manners of headaches.  Unlike Mortgages, Home Equity loans are secondary against the collateral -- the house itself:

House_of_pain "While banks can foreclose on a first-lien mortgage, lenders often have little recourse when trying to collect a delinquent home-equity loan, especially if another bank holds the primary mortgage. Banks holding home-equity loans generally can only seize the collateral -- a house -- after the mortgage is paid off.

When another bank holds the mortgage and the mortgage payments are current, the home-equity lender is effectively powerless to collect the debt.

Unfortunately for home-equity lenders, many borrowers understand that pecking order, concluding there are few repercussions if they stop making payments on their home-equity loan . . . Other types of consumer loans also are souring, including credit cards and auto loans. But delinquent home-equity loans are rising faster, representing 12.5% of all delinquent loans in the fourth quarter at Bank of America Corp., the largest U.S. bank in stock-market value. That was up from 9.4% in last year's first quarter, according to research firm SNL Financial.

Pretty amazing stuff.

The bankers are finally asking themselves "How the hell did we get into this mess?" The answer surprises no one:

Leaning on outside mortgage brokers for home-equity business was "one of the biggest mistakes we've made."  Those loans have performed worse than home-equity loans generated by J.P. Morgan.
-Charles Scharf, head of J.P. Morgan's retail business.

Indeed . . .

>

Source:
Latest Trouble Spot for Banks: Souring Home-Equity Loans
Losses May Hit Lenders That Skirted Subprime; Surprise Delinquents
ROBIN SIDEL
WSJ, March 12, 2008
http://online.wsj.com/article/SB120527998662928743.html

Wednesday, March 12, 2008 | 07:58 AM | Permalink | Comments (61) | TrackBack (0)
de.li.cious add to de.li.cious | digg digg this! | technorati add to technorati | email email this post

bn-image

TrackBack

TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d8341c52a953ef00e5510eb48c8834

Listed below are links to weblogs that reference Latest Bank Headache: Home Equity Loans:

Comments

"This product was meant..."

"meant"... hmmm. I'd say there is a problem. Business is business and you do it by the numbers, not by the meanings, the shadings, the leanings.

Posted by: wally | Mar 12, 2008 8:22:14 AM

The comments to this entry are closed.



Recent Posts

December 2008
Sun Mon Tue Wed Thu Fri Sat
  1 2 3 4 5 6
7 8 9 10 11 12 13
14 15 16 17 18 19 20
21 22 23 24 25 26 27
28 29 30 31      

Archives

Complete Archives List

Blogroll

Blogroll

Category Cloud

On the Nightstand

On the Nightstand

 Subscribe in a reader

Get The Big Picture!
Enter your email address:


Read our privacy policy

Essays & Effluvia

The Apprenticed Investor

Apprenticed Investor

About Me

About Me
email me

Favorite Posts

Tools and Feeds

AddThis Social Bookmark Button

Add to Google Reader or Homepage

Subscribe to The Big Picture

Powered by FeedBurner

Add to Technorati Favorites

FeedBurner


My Wishlist

Worth Perusing

Worth Perusing

mp3s Spinning

MP3s Spinning

My Photo

Disclaimer

Disclaimer

Odds & Ends

Site by Moxie Design Studios™

FeedBurner