HELOC Collapse

The Financial Times has an article out called Home Equity Loans Next Threat to US Banks. It is a short article warning that the next big hit will be from home equity accounts. The losses on the various home equity lines will be big and unlike the Subprime loans or the Option ARMs the banks will be only left with a right off. In many cases the banks will not spend the funds on foreclosure - but they will most times get nothing back during the foreclosure process. Here is a bit of the article:

Home equity loans are rapidly emerging as the next front of the credit crunch, as falling house prices and lax underwriting lead to growing losses for US regional banks that have huge portfolios of such loans on their balance sheets.

The rising defaults on home equity loans, used by people to raise funds by taking out a second mortgage on their houses, underscore how the financial crisis is shifting from big banks’ writedowns on complex derivatives to consumer related problems for smaller banks.

The risks will be shifted - but they will still be felt. There have been warnings of large scale bank foreclosures that will be coming. This coming crisis will hit the small local banks hardest. This will also probably set off a large scale shut down of equity accounts across the U.S. for any fallling markets. The local NJ banks made some conservative choices during the Great Housing Bubble, lets just hope they were conservative enough to survive the HELOC bust.