Education & Events

Watch That Equity!

By Amanda Parsons - ALM Specialist

Bank industry analysts (like the rest of us) have been attempting to figure out how much and how quickly loan loss expenses will drop so that they may predict earnings. Research firm CreditSights Inc. predicts that Bank of America, JPMorgan Chase, and Wells Fargo may have to set aside an additional $30 billion to cover potential home-equity loan losses. According to Amherst Securities Group LP, the above three banks plus Citigroup (the four largest U.S. banks by asset size) hold approximately 42%, or $442 billion of the $1.1 trillion in second-lien mortgages.

According to First American CoreLogic Inc., approximately 24% of homeowners owe more on their mortgages
than their homes are worth. These homeowners are more likely to walk away from their homes. As you know,
second mortgages and most home equity lines of credit (HELOCs) rank behind first mortgages. This means in
a foreclosure they are written off if the proceeds from the sale of the home don’t cover the first mortgage.

Troubled Asset Relief Program Special Inspector General Neil Barofsky reports many first mortgages can’t be
modified or written down because second mortgages and HELOCs have to be written off first, and most lenders
aren’t reducing or wiping out these second liens when modifying mortgages, even if a property is underwater.
Recently the Treasury Department announced their plan to encourage banks to modify or write down principal
on second mortgages in exchange for cash incentives. Only time will tell if these modifications are working.

In the meantime, we would suggest that you continue to monitor both your exposure to real estate equity and your
exposure to changes in HELOC collateralization. If you would like to discuss this further, please contact me directly
at 1-800-622-7494, extension 3265, or aparsons@midatlanticcorp.org.