Although this story is Bank of America-specific, most large banks such as Wells, Chase and CITI are running scared of their Home Equity Line/Loan exposure due to the sheer size of their portfolios, the high risk of default across all borrower grades and the low probability of recovery.
The Journal wrote a great piece on HELOC’s tonight specifically mentioning Wells Fargo, First Horizon and Fifth-Third:
Many (banks) who were caught flat-footed when these loans turned sour now assume that home-equity loan risk already is factored into bank stock prices, which have tumbled. But investors may be too upbeat once again. For one thing, the recent news isn’t exactly uplifting: 2.22% of all home-equity loans were charged off by banks in the second quarter, an all-time high. That is up from 1.69% in the first quarter and 0.9% in the fourth quarter of last year. Tax refunds and government-issued stimulus checks likely are at least partly responsible for why things aren’t worse.
Using this stance, investors should use caution when it comes to First Horizon National. According to a Goldman analysis, 15% of First Horizon’s home-equity loans, or 5% of all its loans, were made by outside parties. Outsider-written loans represented 22% of Fifth Third Bancorp’s portfolio, or 3% of its total loans. And 14% of Wells Fargo’s home loans, or 3% of total loans, were written by third parties.
These three banks also have a relatively high number of home-equity loans that are at least 90% of the value of the underlying houses, which is worrisome. Some investors also are concerned about E*Trade, which bought almost all of the home-equity loans on its book.
In addition, if you want a run down on the banks with the greatest Home Equity exposure, Fitch put out a great report a few months back entitled Big Bank’s Home Equity Woes.
HELOCs were widely kept by the banks and not securitized and sold like most first mortgages. In addition, most HELOCs are not secured by the property any longer because values dropping so much since the time the loans were originated. Most were originated between 2005-2007 and the average LTV was over 80% at the time of origination. Values are down 32% in CA in the past 12-months in CA for example, so you can see the problem. THEY CAN’T FORECLOSE! If they do, the first mortgage holder gets it all, leaving the second lien holder high and dry.
This following is anecdotal evidence, but worth noting.
A friend has a first mortgage at with a national big-name bank and Home Equity Line of Credit through BofA. He bought the home for $900k with 20% down ($720k loan) a year and a half ago. Shortly after the purchase he did a cash out refi for $840k then put a 95% $155k+ HELOC on the property using “current value,” which was allowed at the time. This goes to show how lax lending was in 2006-2007.
Within months of the purchase he was able to pull out all of his total down payment plus $100k when you combine the first and second. He now has total liens of $1,005,000 on a property that was purchased for $910k a year and a half ago and with a current value of approx $895k.
For those of you who are not aware, on first mortgages and HELOCs it was common for banks to allow a new appraisal for valuation purposes and not rely on the purchase price even if the new value was considerably higher. At many banks, this could be done immediately following a purchase. I am not sure what BofA’s policy was at the time, but obviously he was allowed to put a HELOC of $100k greater than the purchase price of the home not long after the original purchase.
As of a few weeks ago, he had not used all of the line and was worried about BofA shutting it down like most other banks have done. The money was his “rainy day fund.” So, he went to a BofA branch and pulled a cashier’s check for $100k and maxed-out the line. The manager had to come out and sign off and she even put him through a light question and answer session. He said she acted a little “concerned.”
Regardless, what the heck is BofA doing allowing a borrower to take out $100k cash on an essentially an UNSECURED Home Equity Line of Credit to 111% CLTV in this market? The borrower is “prime” when looking at his credit score but is salaried in a profession that does not support a million dollars in loans. In addition, he does not have a banking relationship with BofA of any kind. All that he has is a big, fat, open, fully accessible HELOC to 111% of present value.
Values are dropping so fast the banks can’t keep up with it so in the past six months most large-named banks have shut their borrowers out from accessing available credit in what they deemed “declining value” regions. That is most of American now days.
The question I have to ask is if BofA is this far behind the risk curve when it comes to HELOCs, which are front and center, what else are they dropping the ball on? The HELOC issue should be a no-brainer.
I am certain BofA will shut down most HELOCs in the near future, they would be foolish not to. Until that day, the smart ones will continue to max out their HELOCs and in many cases will never have to repay the money. – Best, Mr Mortgage
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