By RACHEL BECK
The Associated Press
Friday, January 18, 2008; 8:44 AM
NEW YORK ? Contrarian investors who think now is the time to start buying beaten-down banking stocks could be in for a shock if they don’t carefully review those companies’ distressed home-equity loan portfolios.
Massive losses tied to subprime-mortgage investments knocked down bank earnings over the last year, spurring investors to flee those stocks. But that could be only the start: Rising delinquencies in home-equity loans and other second mortgages could keep the banks’ results from improving anytime soon.
In recent days, executives at Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co. said missed loan payments were a factor in their quarterly earnings declines. Most said the problem would only get worse.
Why? A so-far small, but growing, number of homeowners who used their homes like an ATM to fund their spending and investment bets are finding themselves in a financial pinch.
During the housing boom, many tapped the rising value of their home equity _ the difference between a home’s market value and what is owed in mortgage debt _ to pay bills or tuition, do renovations, go on vacations and more.
Some borrowers also used something known as “piggyback” loans when buying their homes, which let them finance the full value of their house by combining their first mortgage with a home-equity loan. An unknown number of them gambled that they could double down on the housing boom by tapping their equity to buy other homes and condominiums as investment properties.
But the slump in home prices has changed the dynamics of such loans. Nationwide, prices have tumbled 5 percent since the market peak since early 2006, and some estimates say another 5- to 10-percent decline is still to come. The pullback has been more pronounced in some parts of the country, like southern California where prices are off more than 15 percent since the downturn began, according to DataQuick Information Services.
That means many homeowners may owe close to _ or more _ than the actual value of their homes. In the lending business, that “loan-to-value ratio” is closely watched, and when it gets above 90 percent, there is a greater tendency for borrowers to just walk away.
“Borrowers are seeing themselves get turned upside down, and then they stop paying,” said Mike Larson, real estate analyst at Weiss Research Inc. in Jupiter, Fla. “A lot of lenders underestimated the risk of these borrowers because they did not count on home prices dropping so steeply.”
Some bank executives are playing the blame game for how these troubled loans got on their books. Many say that the most problematic loans weren’t originated by their own underwriters but by outside brokers who were more tolerant of risk.
Regardless of how they got there, they’re a problem. At Citigroup, the delinquency rate on its $63 billion second-mortgage portfolio jumped to a historic high of 1.38 percent in the fourth quarter. A year ago, the delinquency rate on these kinds of loans that were at least 90 days past due was 0.3 percent.
The delinquency rate shot to 2.48 percent for borrowers with loan-to-value ratios of 90 percent or more.
See the full article here:
http://www.washingtonpost.com/wp-dyn/content/article/2008/01/18/AR2008011801204_pf.html
