Delinquencies grow on home equity debt

NEW YORK — NEW YORK -- Just as banks are struggling to get out from under the subprime mortgage mess, they're facing a new burden: growing delinquencies for home equity loans.

Three of the largest U.S. banks that reported earnings this week, Citigroup Inc., Wells Fargo & Co. and JPMorgan Chase & Co., said that mounting pressure on home-equity loans was a major - and growing - problem in the fourth quarter.


JPMorgan's fourth-quarter profit fell 34 percent, a change it attributed at least in part to its lagging home equity products. The bank said it expects home equity charge-offs to rise to 1.5 percent of total loans this quarter.

'Performed worse'


"Our consumer home equity and subprime loan portfolios performed worse than we expected," said James Dimon, chief executive officer of JPMorgan, in a statement.

The bank's continuing pain from subprime mortgage bets that went bad could now be coupled with the newer worry of nonperforming home equity lines of credit.

"JPMorgan is exiting one set of problems and write-downs in one part of the company but now must face more significant issues in the other half," wrote Mike Mayo, an analyst with Deutsche Bank AG, in a note to investors after yesterday morning's conference call with JPMorgan management.

Reserve is raised

Likewise, Wells Fargo announced it would reserve $1.4 billion for losses of its home equity lending unit, more than half of the $2.6 billion it set aside for all loan losses.

The company more than tripled the amount earmarked for losses in the fourth quarter, when profit fell 38 percent.

Well Fargo also will divest itself of more than $12 billion of its riskiest home equity loans, instantly cutting its $72 billion portfolio by 16 percent.

Depreciating homes


Wells Fargo said it was especially hard hit by rising default rates in states experiencing rapid home price depreciation such as California and Ohio.

Citigroup, too, pointed to faltering consumer loans as a major factor in the bank's decision to reserve $5.1 billion for increasing loan losses and delinquencies.

"We had losses in our U.S. consumer business, up over $4 billion, and these numbers completely overwhelmed record performance in many, many of our other large businesses," Citigroup Chief Executive Officer Vikram S. Pandit told analysts Tuesday.

Ratings agency Moody's and consumer credit reporting agency Equifax estimated last week that nearly 4.65 percent of fixed-rate home equity loans were delinquent in the fourth quarter.

Rise nearly doubles

The same data found that across the board, delinquencies on home equity lines of credit have risen to 2.01 percent from 1.07 percent a year earlier.


Home equity loans were a popular option for many borrowers looking to capitalize on a booming housing market.

But as housing prices have rapidly depreciated and the housing market has tanked, home equity loan delinquency rates are increasing.

Borrowers already stressed by a slowing economy, rising gas prices and creeping unemployment are finding payments on home equity loans to be a lower priority.