In a recent interview with the Los Angeles Times, Bank of America CEO Ken Lewis discussed several aspects of the lending crisis, including bank losses on home equity loans. Here a blurb:

“Home equity [loan] deterioration has been much more rapid than we predicted. Our portfolio has a lower loss rate than most but the rate of increase has been pretty substantial. And the severity of loss is much higher than in any other period because of the dramatic house price declines. You’re going from a secured product to an unsecured product.”

When a home equity line of credit is greater than the value of the borrower’s property, the line is no longer secure. If the borrower defaults or the property goes into foreclosure, the bank cannot recoup the entire loan amount through a property sale.

Even if the borrower’s total mortgages do not exceed the property value, the second mortgage lender may not be able to recoup the cost of the loan from a sale. Precedence always goes to the original mortgage holder first.

Since second mortgages are generally recourse loans, banks may be able to pursue delinquent borrowers personally after the property is sold. However, borrowers who have just lost a home to foreclosure will almost always have trashed credit scores and little incentive to pay back what is owed.

See Also:

HELOC Foreclosure

List of Non-Recourse Mortgage States

Tags | Bank of America, Heloc, home equity line of credit, mortgage crisis