Shaky home equity lines of credit (HELOC) loans are overwhelming major banks’ Tier 1 capital which means they need more capital to meet Basel III requirements. B of A, Wells Fargo, Citigroup, and JPMorgan Chase together have about 40% of all home equity loans.
B of A estimates that only about $5 billion, or 4 percent, of its home equity portfolio is current but subordinate to a delinquent first mortgage. Similarly, JPMorgan Chase estimates that about $4 billion, or 5 percent, is current but subordinate to a late or modified first mortgage, excluding the impaired loans it acquired when it bought Washington Mutual.
As a percentage of Tier I capital,
At Wells Fargo, underwater home equity loans—those for which combined mortgage balances exceed the value of the property—were equal to close to half of the company’s Tier 1 common equity at June 30. (The entire home equity portfolio measured 125 percent of Tier 1 common.)
At Bank of America, underwater home equity loans were equal to 45 percent of Tier 1 common, including a $12.3 billion portfolio picked up in the company’s purchase of Countrywide Financial. (Net of loss allowances, B of A carries those loans at about half of their unpaid principal balance.)
Citigroup has the smallest exposure of the four big banks, with underwater home equity loans in the U.S. totaling 17 percent of Tier 1 common. The company has a relatively small share of the home equity loan market, though it cranked up its production of closed-end junior liens for a time during the mortgage boom several years ago.
But home equity lines of credit are by definition revolving loans, and the vast majority of them still are within initial 10-year periods where borrowers are required to make only monthly interest payments.