Sometimes, the sayings of the past can sum up current circumstances fairly well.
In trying to characterize developments since last year, for example, one adage that immediately comes to mind is: "When it rains, it pours."
Another is an ancient Chinese proverb: "Disasters never come alone."
And lastly, there is the popular old favorite: "Out of the frying pan and into the fire."
If you read the following Financial Times report, "Crisis Shifts to Regional Lenders," you'll see just what I mean.
Home equity loans are rapidly emerging as the next front of the credit crunch, as falling house prices and lax underwriting lead to growing losses for US regional banks that have huge portfolios of such loans on their balance sheets.
The rising defaults on home equity loans, used by people to raise funds by taking out a second mortgage on their houses, underscore how the financial crisis is shifting from big banks' writedowns on complex derivatives to consumer-related problems for smaller banks.
Mounting losses on home equity loans are likely to deepen the financial woes of many US regional lenders, increasing the risk that one of them might fail and raising the possibility of a wave of emergency mergers in the sector.
"Home equity loans are a wound on many banks' balance sheets: they are fast becoming a serious problem for small and large institutions," said a Wall Street executive.
Losses on home equity loans have more than tripled in the last six months to 1.54 per cent of outstanding loan volumes.
Analysts expect defaults on home equity loans to rise further as house prices continue to fall in areas such as California and Florida, where some of the largest home equity loan portfolios are concentrated.
The banks with the top 10 highest concentrations of home equity loans as a proportion of their overall lending book, and as a proportion of assets, are almost all regional banks, such as Huntington Bancshares, National City and SunTrust Banks, according to data from Fitch Ratings.
Countrywide Financial, Washington Mutual and First Horizon Financial have the largest exposures as a proportion of total loans, with home equity loans representing more than 20 per cent of their total loan book.
Large banks, such as Citigroup, JPMorgan Chase, Bank of America and Wells Fargo also have large portfolios of home equity loans but their large balance sheets are likely to cushion the blow from any losses on those products.
For the 30 largest institutions, home equity loans account for an average 11-13 per cent of the loan portfolio, according to Fitch.
According to Federal Deposit Insurance Corporation data, on-balance sheet home equity and second-lien mortgage loans increased 43 per cent from year-end 2004 to year-end 2007, compared with 29 per cent growth of total loans. Total outstanding home equity loans now amount to $625bn, according to the FDIC.
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Posted by: anonymous | June 10, 2008 at 05:52 AM