Wells Fargo has been long-rumored to be suffering from their portfolio of second mortgages/home equity loans. This from TheStreet:
NEW YORK — The biggest cost ahead for large mortgage servicers may not be “robosigning” settlements or buying back bad debt – it’s the follow-on mortgage products like home-equity loans that take longer to go sour.
A report on Monday by CreditSights is the latest sign that the biggest cost to banks from the mortgage crisis could be home-equity loans – whose credit-card-like aspects tend to keep borrowers current long after they’ve maxed out the first mortgage.
CreditSights estimates that Wells Fargo has the most exposure to home-equity costs, at $7.8 billion. JPMorgan Chase is right behind with $7.2 billion, followed by Bank of America at $4.9 billion and Citigroup at $3.6 billion. However, the expected lag in performance has allowed big servicers to prepare for the coming HELOC write-offs.
“Home equity will lag because home equity, by its nature, we find lags the underlying prime and the underlying real estate and lags more than most other things,” JPMorgan CEO Jamie Dimon explained in an earnings call last week. “We try to account for that in our reserving.”
Wells Fargo will be the hardest hit for overall costs of the foreclosure crisis, using CreditSights’ figures, with an $11.2 billion, or $2.13 per share, reduction of earnings on an annualized basis.
Bank of America has the second-highest exposure, at $9 billion, or 90 cents per share, followed by JPMorgan at $8.8 billion, or $2.24 per share. Citi’s much-smaller mortgage servicing division would face costs of $4.2 billion, or 14 cents per share
At the crux of its figures is a lawsuit by Ohio Attorney General Richard Cordray against GMAC, seeking $25,000 for each foreclosure document processed improperly in his state, along with undefined restitution to consumers. JPMorgan alone is examining 115,000 filings; Bank of America is examining 102,000.
CreditSights points out that the maximum hit for JPMorgan or BofA would be $2 billion to $3 billion. The debt-research firm thinks settlements are likely to be much lower, in the ballpark of $500 million to $1 billion for those two banks and Wells Fargo and just $200 million to $600 million for Citi.
After Cordray filed suit, all 50 attorneys general banded together to investigate the practices of major mortgage servicers. It’s unclear what the outcome of that nationwide scrutiny will be. Yet it seems clear that the the “robosigning” scandal – in which employees scribbled their “John Hancocks” on foreclosure paperwork without properly vetting the information – may be just the tip of the iceberg in terms of cost for big banks.
CreditSights characterized the potential expense of less than $1 billion apiece as “manageable,” given their annual earnings. Citigroup, for instance, reported $2.2 billion in profit for the third quarter alone. JPMorgan earned $4.4 billion and the other two banks will report earnings later this week.
Jim, Reggie Middleton has written quite a bit about Wells’ HELOC exposure on his blog. He is a hotdog but his research has been spot on the last few years. I bite my tongue at points and remember the old line “There but for the Grace of God goes God” but find reading him worthwhile.
I’ll second that recommendation on Reggie Middleton – I consider him required reading.
I find it difficult to believe that there is only $40B in underwater HELOCs nationwide.
I bet that there is more than that amongst the underwater housedebtors in SoCal alone. And further that the recovery rate from those will be under 10%.
What does Middleton say the total HELOC exposure is?
From Reggie, from Jan 2010:
“The issue of the second liens has to be escalated,” said Richard Neiman, New York’s banking superintendent and a member the Troubled Asset Relief Program’s Congressional oversight panel. The government should consider forcing banks to participate and to recognize the “true value” of second liens, he said.
Bank of America, Wells Fargo, JPMorgan Chase & Co. and Citigroup Inc. carry such mortgages at about $150 billion more than their value, according to estimates by Joshua Rosner, an analyst at Graham Fisher & Co. in New York.
Equity lines and other second mortgages rank junior to typical mortgages, meaning they get wiped out in a foreclosure unless sale proceeds from a seized home exceed the first debt.
http://boombustblog.com/reggie-middleton/2010/01/18/its-heloc-deja-vuall-over-again/