Bank of America (NYSE:BAC), Wells Fargo (NYSE:WFC) and JPMorgan Chase (NYSE:JPM) Extremely Vulnerable to HELOCs

Posted by on Apr 13th, 2010

Based on the conclusion of one of the top research firms, CreditSights Inc., Bank of America (NYSE:BAC), Wells Fargo (NYSE:WFC) and JPMorgan Chase (NYSE:JPM) could be slammed by home equity line of credit (HELOC) loans this year, having strong exposure to them.

When adding this to the re-sets due this year for a large number of mortgages, along with the commercial loans due later in the year, you can see the ongoing weakness in the banking industry in general, and the giant banks in reference to the housing market. Regional and local banks are more susceptible to the commercial loans out there, although there is some limited exposure at the big banks, just not to the degree of the regionals.

Now add to this this potential HELOC threat, and we’re still in for a bumpy ride for some time to come.

There is approximately $1.1 trillion in home equity loans out there in the U.S., with 42 percent of them held by the three banks. The difference between them and a first mortgage on a home, as far as it relates to the performance of a company, is they aren’t bundled as a package with other mortgage to be sold to investors, but are normally kept on the books; at least the majority of them are handled that way, with limited exceptions.

So if there are problems with them, they will directly affect the price of the stock and performance of the banks, as they still hold them under their accounting wings.

While the banks acknowledge there will be write-downs for this sector, they are not looking at it as a major event, while CreditSights thinks it’s much worse than that, with it being so bad it could totally wipe out the expected $30 billion in profits the three banks are expected to generate for the year.

This isn’t being taken into account now because most of them will affect the banks in the third and fourth quarters of 2010. If CreditSights is close to being accurate in their assessment of the situation, it could catch a lot of investors and analysts off guard, which would drive down the share prices of the banks and make everyone wonder what other surprises are waiting for them.

Not only are Bank of America and Wells Fargo the largest mortgage originators in the country, but they hold the most HELOCs as well, making them, along with J.P. Morgan, those who will suffer the most if they indeed become the major problem expected.