Banks Could Face U.S. Home-Equity ‘Payment Shock,’ Moody’s Says

June 26, 2013 Leave a comment

Banks Could Face U.S. Home-Equity ‘Payment Shock,’ Moody’s Says

Home-equity lenders could see delinquencies rise in the next two years as borrowers face a “payment shock,” Moody’s Investors Service said.

The majority of home-equity loans were issued during the housing bubble before the 2008 financial crisis when underwriting standards were “dismal,” Moody’s said today in a report. Those loans will reach the 10-year mark between 2015 and 2017, when borrowers who are paying only interest must start repaying principal, and some won’t be able to keep up, Moody’s said.Home-equity loans were among the largest sources of bad debt in the Federal Reserve’s stress tests of U.S. banks conducted earlier this year, with $37.2 billion of projected losses on junior-lien and home-equity loans. Those tests were designed to show how the biggest U.S. financial firms would fare in a severe economic shock.

“This will slow down the improvement in the banks’ non-performing levels,’’ Sean Jones, associate managing director of banking at Moody’s, said in a telephone interview. “It’s another indicator that they will remain stubbornly high even though the economy elsewhere is slowly recovering.”

Of the 15 rated U.S. regional banks with the largest holdings of home-equity loans, 12 had portfolios greater than their tangible common equity as of March 31, according to the report. The four biggest lenders have comparatively smaller concentrations, according to Moody’s, which said it doesn’t yet know what the costs will be to banks.

Moody’s sketched a scenario in which a homeowner with a $210,000 first-lien mortgage and $40,000 drawn from a home-equity line could face a 26 percent increase in monthly payments when the home-equity loan reaches the 10-year mark.

Banks should start preparing for the payment shock now by surveying clients likely to default and making modifications to reduce losses, according to the report. A stronger housing market and higher capital levels at banks should help mitigate the risk, Moody’s said.

To contact the reporter on this story: Erika Waddell in New York at ewaddell1@bloomberg.net

Filed under Macro Trends

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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