Arnold: Increase Seen in Non-Performing Home Equity Loans
At about 24%, first trust residential loans account for the largest portion of banks' balance sheets; at about 8%, home equity loans are the fifth largest. As was the case with first trust loans, the home equity loans as a percentage of total assets is higher at the money centers at an average of about 12% at Bank of America (BAC) , Wells Fargo (WFC) and JPMorgan (JPM) . Citibank (C) is the only one with a lower figure of about 5%.
In the past three years, the value of home equity loans held by all banks has declined 12%, from about $670 billion to about $590 billion. More than half of these, about $300 billion worth, are concentrated in BAC, WFC, JPM and C with balances of $98 billion, $93 billion, $84 billion and $27 billion, respectively.
The value of the non-performing home equity loans in these four increased dramatically during the first quarter of this year and well above the preceding trend rate of the past three years. The value of loans being accounted for as non-performing roughly doubled at BAC, WFC, and C from the fourth quarter 2011 to the first quarter of 2012.
Non-performing loans are loans that are at least 90 days past due, are no longer accruing interest, but have not yet been charged off against loan loss reserves. At BAC, the jump was from about $2 billion to $4 billion, at WFC from about $2.2 billion to $3.5 billion and at C from $500 million to $1 billion. JPM stayed about the same at $2.2 billion.
For just one quarter, these are massive increases. Most notable, however, is the fact that during this same time there was almost no increase in the value of charged-off home equity loans. During this time frame, the total value of loans of all kinds on the balance sheets of these four money centers declined along with their loan loss reserves. Plus, the decline in loss reserves was greater than the decline in loan value.
The bottom line is that there was a dramatic increase in non-performing home equity loans in the first quarter that rightfully should have been reflected in an increase in charge-offs during the first quarter. This would have reduced loss reserves and mandated that income be set aside to replenish them.