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Next Bank Woe? Home-Equity Loans

Sharing an article from Wall Street Journal:

Home-Equity Loans Pose Looming Threat to Banks

By ALAN ZIBEL

WASHINGTON—U.S. banks may be hit with a new round of mortgage losses over the next five years as borrowers who took out home-equity loans a decade earlier face increased monthly payments, a regulator warned Thursday.

The Office of the Comptroller of the Currency warned that more than half the amount borrowed on equity lines at national banks, or $221 billion out of $380 billion, will face higher payments from 2014 to 2017, exposing banks to the possibility of losses if some equity-line borrowers default.

Home-equity lines extended during the mid-2000s housing-market boom years typically had a 10-year period in which the borrower made only interest payments. When that period ends, borrowers must start to pay back the principal balance as well, increasing monthly payments for some homeowners who have seen their incomes and property values decline.

Darrin Benhart, deputy comptroller for credit and market risk at the OCC, said “banks are going to have to be thinking about ways that they’re going to address” the problem, including debt restructuring.

Analysts have been voicing similar concerns. In a May report, Deutsche Bank AGDBK.XE -2.01% identified First Horizon National Corp., FHN +0.58% PNC Financial Services Group Inc., PNC -1.73% TCF Financial Corp. TCB +0.36% and Huntington Bancshares Inc. HBAN -2.79% as institutions that are most exposed to losses from home-equity lines.

The OCC report, the first in a series of semiannual reports on financial risks in the banking system, also said banks have shifted to higher-risk investments to boost interest rate returns, a development that could create future losses for banks.

The OCC is separately studying which banks could be hit the hardest if interest rates rise. For larger banks the regulator said it would focus on problems with mortgage servicing as well as underwriting standards for business loans and exposure to European institutions. The agency will also scrutinize smaller banks to look at loss exposure from commercial real estate loans and new types of auto and other lending products

The report said banks still face a huge overhang of delinquent and foreclosed properties stemming from the nationwide housing bust. And the nation’s largest banks “continue to face profitability challenges” from deficiencies in their foreclosure-processing operations, which bank regulators are forcing the nation’s largest mortgage servicers to overhaul.

The report, however, said that banks are in a far stronger financial position than before the recession of 2007-2009, with higher levels of capital around the industry, particularly at the largest banks.

Write to Alan Zibel at alan.zibel@dowjones.com

 

 

Written by Angela Donath - Go to Angela's Website/Profile
Angela Donath, The Keith Byrd Team, South County Realtor in San Luis Obispo County, including Pismo Beach, Arroyo Grande, Grover Beach, Oceano, Nipomo, and Avila Beach, 805-801-4355