Agency Warns Banks on Home Equity Loans

June 27, 2013

In about two years, monthly payments are set to rise on many home equity loans that were made before the financial crisis. In a new report, Moody’s Investors Services warns that lenders could face steep losses unless they’re proactive in modifying the loans of borrowers who may not be able to handle the higher payments. 

For example, home owners who have a $210,000 mortgage and a $40,000 home equity loan may see their monthly payment increase about 26 percent when payment of principal on the home equity loan becomes due, according to Moody’s. With home equity loans, borrowers usually only pay the interest for 10 years before they’re required to make larger payments of both interest and principal. 

"Most of these [home equity lines of credit] were originated... between 2005 and 2007, when credit-underwriting standards were dismal," writes Moody’s analyst Thuy Nguyen. "As such, they are a particular concern."

Among the largest banks, Wells Fargo has the highest exposure to risk with home equity loans, followed by Bank of America, JPMorgan Chase, and Citigroup, according to Moody’s. 

Source: “Moody's Warns of Losses from Home Equity Loans,” American Banker (June 25, 2013)

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