Home equity lending is the other shoe that just won’t drop.
Bank portfolios, rather than securitized pools and nonbank lenders, have long held the vast majority of home equity loans, including lines of credit and the “piggyback” junior liens that became a substitute for down payments during the mortgage bubble. In particular, consolidation left the Big Four U.S. banks holding the bag as home values plunged below the amounts borrowed against many properties. But the recovery in home prices has helped reduce underwater loans, even though they still loom uneasily when measured against bank capital. (The first tab in the following graphic shows home equity loans as a percentage of Tier 1 common capital. The other tabs show data on credit performance. Text continues below.)