Citing deteriorating performance of home-equity loans, Fitch Ratings has lowered the debt ratings of some big name banks including Washington Mutual, Wells Fargo, National City, Providian Financial and First Horizon, while warning it may take similar action toward Bank of America, Citigroup, Fifth Third Bancorp and SunTrust.
Home-equity delinquency rates are rising at "a far more rapid pace than even most bankers’ and analysts’ grim outlook for 2008 had anticipated," Fitch analysts said.
In markets such as California and Florida where home prices are falling, loss severities on many loans are hitting 100 percent, and it’s often cheaper for banks to charge-off the entire amount rather than go through the foreclosure process, analysts said.
Fitch downgraded Washington Mutual’s long-term issuer default rating from "A-" to "BBB," in part because of the bank’s heavy exposure to California. About 37 percent of WaMu’s total loan portfolio consists of residential mortgage and home-equity loans to California residents, Fitch analysts said.
Fitch said its rating actions on First Horizon, which included downgrades of both long-term and short-term issuer default ratings, also reflected continuing weakness in the bank’s construction lending portfolio, rising nonperforming assets in the home-builder finance portfolio, and construction loans made directly to consumers for single-family homes.
Issuer default ratings reflect a borrower’s ability to meet financial commitments "on a timely basis" — over the term of the obligation for long-term debts, and within 13 months on short-term issues. Ratings between "AAA" and "BBB-" are considered "investment grade." Lower ratings increase banks’ cost of borrowing — costs that are passed on to consumers.
After reviewing large banks with a large percentage of home-equity loans in their portfolios, Fitch analysts also placed Citigroup, Bank of America, Fifth Third and SunTrust on "Rating Watch Negative," reflecting concerns that deteriorating performance of home-equity and possibly other consumer loans will necessitate future downgrades.
Fitch announced the actions March 7 and amended the list of affected banks Monday.
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