Home Equity

ANALYSIS-After Wells Fargo, home equity has further to fall

By Jonathan Stempel

NEW YORK, Nov 28 (Reuters) - If Wells Fargo & Co (WFC.N: Quote, Profile, Research), regarded as a prudent mortgage lender, must take a $1.4 billion charge for home equity loans that comprise a mere sliver of its total loan book, how much might rivals write off?

The Wells Fargo write-down, largely covering $11.9 billion of home equity loans the bank considers most at risk, shows how the U.S. housing crisis has bled well beyond subprime mortgages to home loans once regarded as relatively safe.

It raises the specter of more pain for other lenders with significant home equity exposure, particularly on loans meant to cover most or all of the homes' value.

"Higher LTV (loan-to-value) loans now carry a much higher risk profile," said Greg McBride, a financial analyst at Bankrate.com in North Palm Beach, Florida. "Borrowers are defaulting in big numbers, and because they had little of their own money invested, lenders are on the hook."

Financial companies have announced some $50 billion of mortgage-related write-downs after the housing decline caused a summer freeze in global credit markets.

Third-quarter loan losses at federally insured banks and thrifts more than doubled from a year earlier to $16.6 billion, a 20-year high, Federal Deposit Insurance Corp data released Wednesday showed. This pushed overall profits down 25 percent to $28.7 billion, the lowest since the fourth quarter of 2002.

SQUIRRELLY DEALS

Home equity loans are generally "second liens," meaning that providers get paid after borrowers pay their primary lenders.

The loans let people, typically with good credit histories, borrow against their homes, often to fund home repairs or to pay off higher-cost credit card debt. A typical rate on a $30,000 home equity loan is 8.39 percent, compared with 13.42 percent on a typical credit card, according to Bankrate.com.

Some loans are home equity lines of credit, which let people borrow up to specified limits. But in recent years, closed-end "piggyback" loans that let home buyers with first mortgages finance up to 100 percent of the homes' value gained popularity.

Easing credit conditions allowed home equity loan volume to triple in the decade ending 2005, when volume first topped $1 trillion, according to the Harvard Joint Center for Housing Studies. Many lenders are now cutting back. Wells Fargo this week significantly curbed its home equity business conducted through brokers.

"It's hard to gauge which lenders are most at risk, but pretty much any large lenders will have exposure because most made piggyback loans in the last three years," said Guy Cecala, publisher of the newsletter Inside Mortgage Finance.

"Many were squirrelly deals to let borrowers work their way around underwriting requirements," he said. "In a declining market, borrowers are realizing it was a bad idea to take out the second mortgages. They are also learning that as long as they keep paying on their first mortgages, they'll keep their homes."

Countrywide Financial Corp (CFC.N: Quote, Profile, Research) and Washington Mutual Inc (WM.N: Quote, Profile, Research), two big mortgage lenders, said they each had at least one-fourth of their loan books in home equity loans as of Sept. 30. Neither immediately returned calls seeking comment.

Lehman Brothers Inc analyst Jason Goldberg, meanwhile, said Bank of America Corp (BAC.N: Quote, Profile, Research), Fifth Third Bancorp (FITB.O: Quote, Profile, Research), First Horizon National Corp (FHN.N: Quote, Profile, Research), SunTrust Banks Inc (STI.N: Quote, Profile, Research) and TCF Financial Corp (TCB.N: Quote, Profile, Research) are among other banks with more than 10 percent of their loan portfolios in home equity.

"Lenders need to generate cash flow for investors, and yet are holding many risky loans they may have difficulty selling or would have to discount," said Robert Manning, a business professor at Rochester Institute of Technology.

"The real crisis may occur when middle-class borrowers start burning through other lines of credit, and their home values still haven't rebounded," he said. "That may occur as soon as a year from now." Manning wrote the book "Credit Card Nation: America's Dangerous Addiction to Credit."

BAD AS IT GETS

Late payments are already surging on home equity loans, several large lenders have said. At Countrywide, for example, the delinquency rate was 4.62 percent as of Sept. 30, up from 2.10 percent a year earlier. (Countrywide's subprime delinquency rate rose to 23.94 percent from 16.93 percent.)

Wells Fargo's $1.4 billion write-down is concentrated in $11.9 billion of particularly risky home equity loans -- 3 percent of its loan book -- largely made through mortgage brokers. It plans to liquidate this portfolio.

The bank said it has $71.5 billion of additional home equity loans it considers safer.

"I've been in the banking industry for over 30 years, and I've worked through three ... housing cycles," Chief Financial Officer Howard Atkins said at an FBR Capital Markets conference on Wednesday. "This is about as bad as it gets."

Washington Mutual ended September with $59.1 billion of home equity loans and lines of credit on its books, or 25 percent of its loans held. Chief Executive Kerry Killinger on Nov. 7 called the downturn "painful," saying it would last through 2008.

Countrywide had $32.7 billion of prime home equity loans held for investment on Sept. 30, or 39 percent of its portfolio. Chief Executive Angelo Mozilo on Oct. 26 said the lender has "a much better chance of success" than any mortgage rival

Bankrate.com's McBride said prospective home buyers will feel much of the fallout. "Lenders want borrowers to bring something to the closing table, other than a pen," he said. "They want borrowers to make down payments, so they have something at stake."

(Additional reporting by John Poirier in Washington; Editing by Gary Hill)

((jon.stempel@reuters.com; +1 646 223 6317; Reuters Messaging: jon.stempel.reuters.com@reuters.net)) Keywords: FINANCIAL HOMEEQUITY/ Keywords: FINANCIAL HOMEEQUITY/

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