The Home Equity Crisis Ahead ....banks that dodged the subprime bullet face losses

The Home Equity Crisis Ahead
Even banks that dodged the subprime bullet face losses from loans based on homes now at risk

Subprime mortgages have taken a lot of blame for banks' big losses. But there's another problem lurking behind the mess: home-equity lending.

Buoyed by rising prices, borrowers increasingly tapped into the equity on their properties to finance a new car, renovations, or even a down payment, making equity a key source of consumers' strength. But with the housing market in disarray and prices plunging, the business of home-equity lending is souring. At least $14.7 billion in loans and lines of credit were already delinquent through the end of September—the highest level in a decade. "After subprime, home-equity lending is the biggest problem the industry has right now," says analyst Frederick Cannon of Keefe, Bruyette & Woods.

What's more, there's little that can be done to prevent the pain from the deterioration of this $850 billion market. A lender on a mortgage has the first claim on the underlying property. In the case of foreclosure, it can sell the property and recoup some money. The bank with the home-equity piece has no such collateral and is usually out the money. "The home-equity lender is going to get hosed," says Amy Crews Cutts, deputy chief economist at mortgage giant Freddie Mac (FRE).

http://www.businessweek.com/magazine/content/08_04/b4068000575390.htm