| ALL BUSINESS: Banks face more woes from rising delinquencies on second ...
Contrarian investors who think now is the time to start buying beaten-down banking stocks could be in for a shock if they don't carefully review those companies' distressed home-equity loan portfolios. Massive losses tied to subprime-mortgage investments knocked down bank earnings over the last year, spurring investors to flee those stocks. But that could be only the start: Rising delinquencies in home-equity loans and other second mortgages could keep the banks' results from improving anytime soon. In recent days, executives at Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co. said missed loan payments were a factor in their quarterly earnings declines. Most said the problem would only get worse. Why? A so-far small, but growing, number of homeowners who used their homes like an ATM to fund their spending and investment bets are finding themselves in a financial pinch.
New alarm: Option-ARM 'liar's loans'
The no-worries lending that inflated the housing bubble is resulting in a flood of soured option-ARM loans, adjustable-rate mortgages that allow borrowers to pay so little every month that their loan balances rise rather than fall, sometimes sharply.
Numbers from industry trackers suggest that these borrowers, most of whom boast respectable and often top-tier credit scores and appear to have substantial incomes and home equity, are starting to create a second tide of defaults for lenders swamped by the meltdown in subprime loans made to people with bad credit or overstretched finances.
Countrywide Financial Corp., the top option-ARM lender, will be hit hard. Already reeling from the subprime mess, Countrywide was rescued from possible bankruptcy this month by Bank of America Corp., which agreed to acquire it for about $4 billion.
Reverse Mortgages: The Choices Expand
Only a year ago, homeowners interested in reverse mortgages had little to choose from beyond the plain-vanilla, government-backed products that have long dominated the market. Such mortgages essentially allow homeowners at least 62 years old to sell a large chunk of their home equity back to a bank or other lender in exchange for a lump sum, monthly payments or a line of credit. Now, nearly a dozen large banks and mortgage lenders have launched reverse-mortgage products with lower fees and larger payouts. One lender has reduced the minimum age requirement to 60; others are making loans on second homes and vacation rentals. "Jumbo" reverse mortgages -- for houses valued at as much as $10 million -- are becoming more common. With a reverse mortgage, instead of the borrower making payments to the lender, the lender makes a payment or payments to the borrower.
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