Moody's: Banks face risks from bubble-era home equity loans

Monthly payments by borrowers with home equity loans made in the easy credit days of the bubble are set to jump in about two years, putting banks at financial risk, warned international ratings agency Moody’s Investors Service.

The agency recommends lenders, in order to avoid incurring losses, take steps now to identify borrowers who may not be able to afford the higher payments and modify their loans.

About $552 billion in U.S. home equity loans were outstanding as of March 31, and the lines had a combined $486 billion of credit available to be drawn down, Moody’s found.

Home equity loans typically allow borrowers to pay only interest for 10 years before the terms obligate the borrower to make larger monthly payments of both interest and principal, American Banker reported.

Homeowners who have a $210,000 mortgage and a $40,000 home equity loan can expect to see their monthly payment increase about 26 percent when payments of principal on the home equity loan come due, according to Moody’s.

Among the nation’s four biggest banks, Wells Fargo has the greatest home equity exposure, followed by Bank of America, JPMorgan Chase and Citigroup, American Banker said.

Source: American Banker