Bank of America Corp., JPMorgan Chase & Co. and Wells Fargo & Co. may have to set aside an additional $30 billion to cover possible losses on home equity loans.
The calculation was done by CreditSights Inc., a New York research firm whose prediction almost four years ago proved prescient after banking companies reported unprecedented mortgage-related writedowns. Recognizing the home equity loan losses is unfinished business, CreditSights said in a report late last month.
Potential writedowns on the loans are casting a shadow over earnings as analysts try to determine how much, and how quickly, loan-loss costs will decline from an industrywide peak reached in June 2009. Banking companies led by New York-based JPMorgan Chase are to begin reporting first-quarter results this week.
"While a lot of people are looking for dramatic improvement in the short term, one area that still has to be worked through in a material way is home equity," said Baylor Lancaster, senior bank analyst in Miami for CreditSights.
This will take months, and the writeoffs will not hit financial statements until later this year, he said.
Action in Washington could spur banks to act. Rep. Barney Frank, the House Financial Services Committee's chairman, is to hold a hearing today on how second-lien loans hobble the reworking of homeowners' debts and an easing of the foreclosure crisis. Frank sent a letter March 4 asking banks to recognize more losses in order to clear the way for mortgage modifications.
The four biggest U.S. banking companies by assets — Bank of America, JPMorgan Chase, Citigroup Inc. and Wells Fargo — hold about 42%, or $442 billion, of the $1.1 trillion in second-lien mortgages, according to Amherst Securities Group LP, an Austin firm that analyzes home loan assets. Late payments on home equity loans set a record in the fourth quarter, the American Bankers Association said on April 7.
"Banks have been saying we're close to the end," said Nancy Bush, an independent bank analyst at NAB Research LLC in Annandale, N.J. "People have built that into their expectations. I don't think we're there yet."
Second-mortgage loans are shaping up to be a big bump in the road, said Paul Miller, an analyst at the FBR Capital Markets unit of Friedman Billings Ramsey & Co. in Arlington, Va., and a former bank examiner. "There's very little recovery for home equity loans," he said.
Mary Berg, a Wells Fargo spokeswoman, said it is awaiting government data about second liens that are eligible to be modified. Jennifer Zuccarelli, a spokeswoman at JPMorgan Chase; Bank of America spokesman Scott Silvestri and Citigroup spokeswoman Natalie Riper declined to comment.
Second-lien reserves set aside by the four big companies are $100 billion to $125 billion short of what's needed in the next few years, said Joshua Rosner, an analyst at Graham Fisher & Co., an independent research firm based in New York. "If banks were properly accounting for their second liens, there would be no problem with them choosing to do principal writedowns," he said in a phone interview. "They would already be reserved for it."
About 24% of homeowners owe more on mortgage loans than their houses are worth, according to First American CoreLogic Inc., a San Francisco provider of mortgage data and analytics.
"The banks are saying that they can work through it," Lancaster said. "Our view is that it may be bigger than they are letting on."