2nd Mortgage Holders (Banks) Now to be Bailed Out Too - Breaking!

Posted on July 23rd, 2008

Our nations largest banks are being weighed down by 2nd mortgage liens (Home Equity Lines/Loans or HELOCs). You have heard this in many of their earnings calls recently. The home equity market is thought to be as large as $1.3 trillion.

For many banks this is their largest residential mortgage exposure. For example, Wells Fargo still carries $84 billion and Bank of America and Chase about $100 billion a piece. The banks were very touchy in their recent earnings reports on this topic. Wells Fargo actually changed the definition of ‘default’ from 120 days to 180 days to push out defaults further consequently hiding losses. See my report on Wells Fargo’s mystery earnings.

Real losses on 2nd mortgage portfolios will befall the banks, as values continue to fall and these newly unsecured loans default without the ability for the bank to foreclose. But now it looks as though the tax payers could shoulder much of the risks FHA will assume when doing all of these bailout, ‘underwater refis’.

How much can FHA shoulder when they admitted lately that they were on the brink after a $4.6 billion loss and have an 18% default rate. Mish wrote about it recently. Why would these loan perform any better than private sector subprime loans that have been modified in the past.

A recent report just came out that said 50% of all previously modified subprime loans are now in some stage of default. This is the ‘negative equity effect’, ‘borrowers never qualified in the first place epidemic’ and ‘public sector non-profit loan modification ignorance’ in full-force.

“Analysts at Moody’slast week said that 42% of all ARM subprime loans previously modified during the first half of 2007 are now 90-days or more delinquent by March 2008. That number goes up to 50% when looking at loans 60-days delinquent.â€