A New Kind of Mortgage Trouble Is Brewing at Bank of America

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Big banks are in the soup again for home loans made during the freewheeling years right before the financial crisis. This time, though, the ghosts returning to haunt Bank of America (NYSE: BAC  ) , JPMorgan Chase (NYSE: JPM  ) , and Wells Fargo (NYSE: WFC  )  are not those of first-lien, purchase mortgages, but home equity lines of credit.

Billions of dollars' worth of these loans -- dubbed Helocs -- will turn 10 years old very soon, ballooning borrowers' payments and putting the loans in danger of default. This could turn into a big headache for Bank of America, which holds a larger share of these loans hitting that benchmark date than its peers.

Legacy Helocs could cause trouble
Home equity lines of credit were hot during the run-up to the financial crisis, when banks would often lend in excess of 100% of a home's value. In 2007, banks racked up $310 billion in Helocs, the biggest one-year tally. Plummeting home values during the crisis put an end to the Heloc party, and lending activity fell. Banks are once again offering these loans, however, as property values begin to recover -- though they are more cautious these days.

But those old loans are beginning to cause problems. As Helocs approach the 10-year mark, borrowers will soon be required to pay more than just the interest on the loan, as principal payments begin to kick in, as well. The "reset" value of these payments can be large, adding another $500 to $600 to each monthly payment. Already, borrowers with Helocs taken out in 2003 are beginning to miss their payments, prompting officials from Equifax to forecast a "wave of disaster" over the next few years for the banks holding these loans.

Not as secure as once thought
Banks have often thought of these loans as relatively secure, since they were backed by borrowers' homes, and delinquencies were usually low. The mortgage meltdown has changed that thinking, and banks now face losses on $221 billion in Helocs between 2014 and 2018.

Banks generally keep Helocs on their balance sheets, as payments fluctuate with interest rate changes, giving banks a hedge against rising rates. Since these loans are usually the second lien on a home, however, banks can face a complete loss if borrowers default.

Currently, banks are holding about $529 billion of Helocs, with Bank of America holding $81.4 billion, Wells Fargo nearly $80 billion, and JPMorgan Chase a little over $70 billion. According to Bank of America's latest 10Q filing, Helocs represent 85% of the bank's total home equity portfolio.

Helocs are heating up again
Banks seem to be responding to this possible threat to their balance sheets by ramping up Heloc lending again. Analysts estimate that the value of these loans will reach more than $90 billion for this year, and will climb to $97 billion in 2014.

Bank of America is right out front in Heloc origination, having increased home equity lending nearly 70% this year, compared to 2012. By the end of September, the bank had $4.4 billion of new Helocs on its books. While banks are being more careful this time around -- only loaning 85% of untapped equity, for example -- borrowers are taking out these loans for extravagant purposes, such as pricey home renovations. Once again, it seems, homeowners are treating their home equity like a piggy bank, and banks are happy to enable them.

Then, there's the issue of how much of those legacy Helocs will be coming due in the next few years. For Wells Fargo, about $30 billion will reset by 2017, and for JPMorgan, the amount is similar -- around $31 billion.

Bank of America, however, is looking at approximately $65 billion in resets during a similar time period. In addition, a higher percentage of Helocs created in 2006 were essentially subprime -- which means, very probably, that many were written by Countrywide back in the day and could be more apt to default. Once again, when it comes to cleaning up after trashy mortgages, Bank of America will likely be mopping up the biggest mess.

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Read/Post Comments (9) | Recommend This Article (9)

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  • Report this Comment On December 01, 2013, at 10:31 AM, TheTruth wrote:

    Bank of America is laying off a lot of people at the end of the year and will not be giving them their annual bonus. Even though they earned it and worked the entire year, they stated since they did not last until February when the payout is, they don't qualify. Do not do business with this heartless company. Happy Holidays!!

  • Report this Comment On December 01, 2013, at 11:22 AM, gr8iml8 wrote:

    I don't think Heloc resets pose the same magnitude of risk as the housing crisis. This article would have been much more useful if it had developed a clear picture of future housing foreclosures triggered by Heloc resets.

    Given the continued rise in housing value combined with historically low mortgage rates, I don't think the big three mortgage lenders are at risk.

    I am long WFC and BAC and this article leaves me unconcerned about holding these positions long term.

  • Report this Comment On December 01, 2013, at 12:01 PM, Wasatcher wrote:

    Isn't this exactly more of the same from these thieving banks? They're just setting up more hard working homeowners so they can steal YOUR investment in home ownership, the American dream -- HA! Bank of America bought my mortgage from Countrywide, so they did not expend one thin dime on my behalf and absolutely refused to do anything to help me keep my 25 year investment in home ownership when they and their fellow Fraud Street bankers and investors destroyed the economy AND the lives of millions of Americans, including me and my family. They were in a win-win situation -- my mortgage cost them absolutely nothing, they refused to help me, but gladly pocketed the $280,000 in cash that some rich guy offered for my home that appraised for $740,000 just three short years earlier. AND, they pocketed billions in bail out money that was given to them to help homeowners like us -- but the money was used to pay out huge bonuses to their employees who helped them orchestrate this housing disaster that greatly benefited the banks and destroyed the homeowners! They had no problem giving my house to that rich guy for a ridiculously low amount of money when my house is worth so much more (his equity NOW), but couldn't see fit to help us keep our home in which we invested hundreds of thousands of dollars. It was more lucrative for them to just sell our home to the first guy with cash and that's exactly what they did. My dream home is now some rich guy's second home. Also, we had to claim the money the bank got for our home as income even though we didn't receive anything from the sale of our life's work. BofA's CEOs couldn't care less about our loss of everything we worked 30 years to gain. This housing mess is the biggest crime ever pulled off against the American people and it was done with the help of the greedy, corrupt idiots running the federal government. Anybody who conducts business with Bank of America is asking for it and the American people need to vote out every incumbent in every elected office, from local government to the feds -- oust the corrupt jerks! Beware, you're next!

  • Report this Comment On December 01, 2013, at 2:16 PM, Rusty56 wrote:

    The article is useless from an investing perspective.. This stock was at $7 to $8 when the author, a young kid, was printing negative articles in the past. She will be doing so again when the price of the stock is north o $20.

  • Report this Comment On December 01, 2013, at 2:49 PM, largei wrote:

    These large banks are not worried about these toxic assets such as helocks that they have created or bought up in that they know the Federal Reserve is in the process of creating years of rampant inflation. Several years of double digit inflation will allow both the Federal Reserve and these large banks to write off these toxic assets with very little impact on their bottom line simply as a result of the drastic reduction in the value of the dollar. Unfortunately, this same inflation will be devastating to the already meager economic wellbeing of the working class, especially senior citizens on fixed incomes.

    Unless you already have a stock portfolio worth multimillion dollars or are presently earning far more than needed to support your desired lifestyle, it is absolutely time to tell your representatives in Congress, Senators and Representatives, that they need to rein in the vast authority they have bestowed on the Federal Reserve and stop this ill-conceived policy of quantitative easing.

    The undeniable fact is that the extremely overpriced stock market needs to be allowed to fall back to realistic levels that are consummate with the economic conditions of the nation or we will face the devastation of inflation like never experienced in the history of this country.

  • Report this Comment On December 01, 2013, at 3:16 PM, sek0mi wrote:

    people like Wasatcher continue to amuse me. They over extended themselves with the help of Barf-me Frank and want to blame banks instead of looking in the mirror.

  • Report this Comment On December 01, 2013, at 6:08 PM, JamesD77 wrote:

    Why don't they just refinance under oblama's program like I did? We lost 50% of our value and still refinanced under Harp (think that's the name). Got my rate down to 2.875% Not sure what Wasatcher's problem is other than stupidity.

  • Report this Comment On December 01, 2013, at 6:09 PM, JamesD77 wrote:

    This article sounds like nonsense to me. Refinance.

  • Report this Comment On December 02, 2013, at 11:04 AM, Martininsocal wrote:

    First and foremost, BofA are a bunch of banksters who don't care about the folks who do business with them. Period.

    Now the funny part- Many folks who took out big bucks against their primary homes were able to then pay cash for a second or retirement home in places like Mexico and Costa Rica. When the banksters ran their play to destroy the middle class and consume the dollars they had convinced the middle class to expose, they took many of the primary homes through foreclosure at bargain basement prices. BUT! The folks who bought out of countrynow had a paid for home with no commitment to the bank. I guess there is a little karma in the world. Suck it easy BofA, you deserve it!

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