Wells Fargo & Co (NYSE: WFC) and Bank of America (NYSE: BAC) have the most exposure to home equity loan losses as lenders face increasing pressure to write down the value of secondary loans more aggressively, according to a new report from CreditSights on Tuesday.
JP Morgan Chase (NYSE: JPM) is also exposed to home equity loan losses and Citigroup (NYSE: C) is the least exposed of the four large-cap U.S. banks.
There’s a new government initiative which is pushing banks to forgive billions of dollars worth of principal on underwater mortgages, but those often loans cannot be modified without potentially removing or minimizing any second mortgages that are on a home.
“Residential-mortgage exposures, especially high LTV home equity loans, remain a significant headwind for large banks’ credit quality in 2010, especially B. of A., Wells Fargo and, to a lesser extent, J.P. Morgan Chase,” CreditSights wrote.
A 40% write-down by Wells Fargo on home equity loans with loan-to-value ratios of more than 100% could knock $12.8 billion or about $2.47 worth of revenue out of the bank’s earnings.
A similar write-down would hit Bank of America with an earnings loss of $7.4 billion or about 74 cents per shares, according to the firm.
JP Morgan would take a $9.6 billion hit and Citigroup would take a $3.4 billion hit from similar write-downs.
