Just when you think the sub-prime lending practices have created major havoc on our financial stability, another consumer lending practice creeps into the picture. Remember all those home equity loans? Yes, they’re still out there. And delinquency rates are starting to increase very quickly; much faster than any of the experts anticipated. Added to our current woes, it’s not gonna be pretty.
Guess which of these loans are more likely to default? Would you believe those loans originated by brokers or third party lenders? Surprise, surprise, surprise. If the home is in an area that’s experiencing depreciation in value, default tends to be more prevalent. Homes that tend to depreciate the most are those that are in declining markets that are experiencing a high number of foreclosures. Loans that were granted with little to no documentation are performing badly too. Sound familiar? Well, at least we have a warning, not that it helps us do anything other than realize the worst is yet to come.
Fitch Ratings has been watching the banking industry and keeping its eye on those who have home equity exposure as a large percentage of their portfolio. Here’s a few of their observations.
Washington Mutual appears to have quite a few home equity lines open, and they have their fair share of residential mortgages as well. A small amount of loans, about 7%, make up the subprime section of their portfolio and as expected, a larger than normal share of the net charge-offs. As much as 37% of Washington Mutuals total portfolio includes residential mortgages and home equity loans in California. Uh-oh….that’s not good.
First Horizon has a large percentage of its portfolio invested in construction lending, both for homebuilders and directly to consumers. Fitch sees weakness with First Horizon at least through 2008 and into 2009.
Other financial institutions that have been downgraded are:
First Tennessee Bank, NA
First Tennessee Capital I and II
National City Corporation
National City Bank (Cleveland)
National City Bank of Kentucky
National City Bank of Indiana
National City Bank of Pennsylvania
National City Credit Corp
National City Bank (Columbus)
Provident Bank
AND THE LIST GOES ON AND ON.
Some of our more recognizable banks and finacial institutions are now on Watch Negative including Citigroup, Citibank, Suntrust, LaSalle Funding, Bank America and MBNA just to name a few.
This subprime lending scheme and the resulting credit tightening and default increases has rippled through our economic system. Back in the 80’s we had a similar real estate debacle involving the Savings and Loans, who provided risky loans that went bad. The government bailed them out at taxpayers expense. The Resolution Trust Company (RTC) was born and spent the next decade clearing out the stockpile of foreclosed and abandoned properties that flooded the markets across the country.
I was reading about a veiled new government plan to save us from our latest real estate woes. I wonder how the bailout will be structured this time…and believe me, whatever they come up with, it will be a bailout for some affected group. Whatever the plan, or even if there’s not a “plan”, the taxpayers and the consumers will pay through the nose. We always do.
