Home equity loans are a ticking time bomb in the banking sector

Thinking about filing for bankruptcy? If so, you might want to ponder who has it worse off in our current economy — the debtors or the creditors?

Ridiculous question, you say?

Perhaps, but in law it is always worthwhile to examine cases and situations from your adversary’s point of view.

When debtors get pestered with collection efforts or bang their heads against the wall for months trying to modify an underwater mortgage, it is easy for them to forget what a bind the banks and loan operators are in. And strange as it may sound, their problem is part of your problem, too.

Case in point: it is now probable that banking giants Chase, Bank of America, and Wells Fargo may have to set aside an additional $30 billion — yes that’s $30 BILLION — dollars to cover write downs on home equity loans.

Home equity lines are particularly troublesome to banks because they are the mortgages least likely to be secured in areas like Massachusetts and southern New Hampshire which have suffered rapid declines in housing prices.

According to Bloomberg News, “Second-lien mortgages and most home equity lines of credit rank behind first-lien debt, meaning they get wiped out in a foreclosure if the sale of a home does not raise enough to pay off the first mortgage. Second liens are often closed-end loans in contrast to home equity lines of credit, which can remain open for borrowers to withdraw money, much like a credit card.

In many cases, first mortgages cannot be modified or written down because lien priority dictates that junior loans be erased first. Few lenders have agreed to reduce or extinguish home equity loans when modifying mortgages, even if a property is worth less than what is owed, according to a report by Troubled Asset Relief Program Special Inspector General Neil Barofsky.

The four biggest US banks by assets — Bank of America, JPMorgan, Citigroup Inc., and Wells Fargo — hold about 42 percent, or $442 billion of the $1.1 trillion in second-lien mortgage loans, according to Amherst Securities Group.

Late payments on home equity loans rose to a record in the fourth quarter, the American Bankers Association said April 7.”

Debtors considering a Chapter 13 bankruptcy case may be able to eliminate or reduce the principal on home equity lines through their Chapter 13 plan. This needs to be evaluated on a case by case basis, though, so your best bet is to discuss it with a bankruptcy attorney.


By Doug Beaton

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