Fitch sees $65 billion in U.S. bank losses on home equity in 2010

June 10, 2010 by · Leave a Comment
Filed under: Real Estate News 

In Reuters release, Fitch (ratings agency) is projected a over 100% increase in home equity losses.  These will primarily stem from home equity loans and 2nd liens on residential real estate.  The surprising comment was that this will have a minor impact on credit ratings for the banks that are holding this paper.

They cite the increased loan loss reserves and increased capital levels.  Another point that is not mentioned is the effects of the changes to FASB 157 and how banks are allow to record and valuations that are more likely than not an inflated value compared to an actual fair market price.

Fitch also reported that we should see another 10-15% decline in the next year to year and a half so these losses will continue to climb in lockstep with losses at the banks.

Reuters – U.S. banks’ losses from home equity portfolios could rise to $65 billion this year from about $31 billion in 2009 in a persistently weak housing market, said Fitch Ratings on Wednesday.

But these rising losses to U.S. FDIC-insured financial institutions from home equity loans and second lien charge offs will likely have a minor impact on ratings, Fitch said in a special report titled “U.S. banks’ home equity portfolios: a revisit.”

“Fitch expects that future bank rating action to be limited and will not likely be the result of home equity weakness alone, but in combination with other factors,” the rating agency said.

Among Fitch’s concerns are elevated losses from consumer loan portfolios and higher losses anticipated in commercial real estate portfolios. However, a mitigating factor is that as a result of the credit crisis, financial institutions “have built substantial loan loss reserves” and increased capital levels, Fitch said.


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