Source: Seattle Times

Bank of America, JPMorgan Chase and Wells Fargo may have to set aside an additional $30 billion to cover possible losses on home-equity loans, an amount almost equal to analysts’ estimates of profit at the three banks this year.

The cost of these reserves was calculated by CreditSights, a New York-based research firm.

Recognizing the home-equity-loan losses is unfinished business from the housing bubble, CreditSights said in a March 29 report.

Potential writedowns on the loans are casting a shadow over earnings, as analysts try to determine how much, and how quickly, loan-loss expenses will decline from the industrywide peak reached in June 2009.

Banks led by New York-based JPMorgan begin reporting first-quarter results this week.

“While a lot of people are looking for dramatic improvement in the short term, one area that still has to be worked through in a material way is home equity,” said Baylor Lancaster, senior bank analyst at CreditSights in Miami.

The process will take months, and write-offs won’t hit financial statements until later this year, Lancaster said.

“The banks are saying that they can work through it,” Lancaster said. “Our view is that it may be bigger than they are letting on.”

Action in Washington could spur banks to act. Rep. Barney Frank, chairman of the House Financial Services Committee, is scheduled to hold a hearing Tuesday on how second-lien loans are getting in the way of reworking homeowners’ debts and easing the foreclosure crisis.

The Massachusetts Democrat sent a letter March 4 asking banks to recognize more losses in order to clear the way for mortgage modifications.

Second-lien mortgages and most home-equity lines of credit rank behind first-lien debt, meaning they get wiped out in a foreclosure if the sale of a home doesn’t raise enough to pay off the first mortgage.

Second liens are often closed-end loans in contrast to home-equity lines of credit, which can remain open for borrowers to withdraw money when needed, much like a credit card.

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In many cases, first mortgages can’t be modified or written down because lien priority dictates junior loans be erased first.

Few lenders have agreed to reduce or extinguish home-equity loans when modifying mortgages, even if a property is worth less than what’s owed, according to a report by Troubled Asset Relief Program (TARP) Special Inspector General Neil Barofsky.

The four biggest U.S. banks by assets — Bank of America, JPMorgan, Citigroup and Wells Fargo — hold about 42 percent, or $442 billion of the $1.1 trillion in second-lien mortgage loans, according to Amherst Securities Group, an Austin, Texas-based firm that analyzes home-loan assets.

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