HEL Exposure Hurts Big Lenders

Fitch Ratings said it took negative ratings actions earlier this month on eight large U.S. banks based partly on home equity exposure. HEL challenges are expected to persist through 2009.

On-balance sheet home equity and second-lien mortgage loans increased 43 percent from the end of 2004 to yearend 2007. Fitch noted that advances outstanding against HELOCs are just under half of the available lines. About $718 billion was available in un-drawn advances at the end of last year.

At the 17 largest U.S. banks, HEL exposure was over 10 percent of their mortgage holdings.

Among companies with the biggest exposure to HELs at the end of last year were Countrywide, with 31 percent of its loans being second lien HELs or advances drawn on home equity lines-of-credit; Washington Mutual Inc., with 26 percent exposure; and First Horizon national Corp., at 26 percent. National City Corp. followed, with 22 percent exposure; then Wells Fargo & Co., at 21 percent.

Among the biggest factors impacting HEL performance is the origination channel, with broker- and correspondent-originated HELs performing more poorly. Fitch speculated this could be the result of brokers’ focus on volume, customer relationships that are limited to mortgages and a broker’s ability to “game a bank’s underwriting process.” Companies with high concentrations of broker-originated HELs were National City, with 42 percent of its HELs being originated by third parties; JPMorgan Chase & Co., with 40 percent; and Countrywide, which doesn’t report the exact figure.

The property location also has impacted HEL performance, with loans secured by California, Florida, Michigan and Ohio properties having the greatest exposure — leaving some borrowers with negative equity. WaMu had the highest exposure to California and Florida, at 64 percent of its HEL portfolio.

Loan-to-values above 90 percent also left the lenders exposed. Among lenders with the highest weighted average LTVs were Countrywide, at 84 percent, and Huntington Bancshares, at 80 percent.

Fitch noted lenders with higher proportions of first lien HELs are in a better position. These companies included KeyCorp., with 57 percent of its HELs being in first position; Regions Financial Corp., with 41 percent; and PNC Financial Services Group Inc., at 39 percent. Among those with the most exposure were Wells Fargo, with just 14 percent of its HELs being in first position — though many of its seconds are behind a Wells Fargo first mortgage.

While FICO score is also an indicator of risk, the report indicated risk layering diminished its predictive capabilities. Sovereign Bancorp Inc. had the highest weighted-average FICO among the 14 biggest HEL lenders at 774, while Bank of America Corp. had the lowest, at 721.

Wells Fargo and Countrywide were among lenders that used private mortgage insurance to mitigate their HEL risk, though Fitch said it has yet to be seen how this will ultimately play out.

The level of loan documentation is also significant.

“A particularly toxic situation emerges when more than one of these characteristics is layered onto the product,” Fitch said.

Delinquency of at least 30 days on HEL portfolios was 5.92 percent at Countrywide on Dec. 31, 2007 — soaring from 2.93 percent a year earlier. This was attributed to higher California concentrations, more third-party originated loans and higher LTVs.

Fifth Third Bancorp had a 1.77 percent delinquency rate at the end of last year. Ohio and Michigan loans, as well as third-party originations and high LTVs, affected Fifth Third’s delinquency,

National City followed, at 1.76 percent. The company was impacted by Ohio and Michigan originations, though broker originations and California and Florida concentrations also played a role.