What effect does the second mortgage or heloc have on a bank's exposure to the mortgage mess? So far, most banks are reporting that less than 5% of their second lien home loans are late. But, how can that be? By September 2009, 14.4% of all mortgages outstanding were either delinquent or in foreclosure. Either a disproportionate number of borrowers that had only taken out a first are in trouble or the banks are under-reporting on the seconds' delinquency rate. It'd be more reasonable to see somewhere around 10-12% of the seconds being reported as problems. Could the banks be attempting to minimize this number and, if so, why?
It's been reported that second loans comprise somewhere around $426 billion in value on the balance sheets of BofA, JPM, Wells, and Citi and others. Weiss Ratings has released a chart which shows that 16 of the biggest U.S. banks have such large exposure to second loans that it in may cases dwarfs their shareholder equity. In other words, if the second loans were to all go bad, the banks would essentially be broke. (Never mind the first loan exposure these banks carry.) It's beginning to look as if the banks would rather ignore the problem and cover it up in the hopes that no one will notice. It's now officially too late for that, since Reuters has issued a special report which covers the issue. (Source: Full Reuters Report)
My point is that, if you don't think this mortgage mess is serious and is going to need some massive intervention, you're mistaken. In my opinion, we're far past the point of being able to "muddle through" as some commentators have proposed as a viable solution.
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