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Souring Home-Equity Loans

Posted by ecoshift on March 12, 2008

Latest Trouble Spot for Banks: Souring Home-Equity Loans – WSJ.com
“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.

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