Monday, 18 January 2010 23:00

It's HELOC Deja Vu,All Over Again

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 A little more than a year and a half ago, I penned "A little more on HELOCs, 2nd lien loans and rose colored glasses",:

I syndicate my work across various sites on the web and occasionally go through the comments to see what people think. I get viewers of all types, from first time investors and the curious to multi-billion dollar portfolio managers and directors of analytical departments of the bulge brackets. It is the guy in the middle, the arm chair investor that seems to throw some of the wierdest comments, though. One of which was, "banks are more complicated than HELOC exposure and LTVs and it will take more than that to determine a bank short". Well, that comment is partially true. Today's banks are much  more complex than LTVs and 2nd liens, but when these risky products on the downturn are multiples of your tangible capital, it really doesn't take more than that to start causing some severe solvency issues. You can have a trillion dollars in assets, but if you have $20 billion in equity with $100 billion in investments that will take a 50% loss, you are underwater by $30 billion. You can talk about these banks using terms such as "complicated", "complex", "fancy" and all of the other high falutin' adjectives that you can think of, but at the end of the day, if you lose more than you own you are insolvent. Now, that's a simple concept and it works quite well for my investment pursuits. This is coming from a guy who use to design offshore, option embedded structured products to fund illiquid private sector liabilities for things such retiree health care risks. Having some experience in the structured product arena, being an entrepreneur, and simply having to balance the family budget, I have come to learn - without a doubt - that complicated usually means less valuable. Either that, or it means an opportunity to charge the client more through lack of transparency in the pricing and profit structure.

Following the geographic default graph for HELOCs reproduced from the last posting, you see the two states that have been in the news the most lately have big spikes in my pretty little graph.


Now, if we drill down into those two big stalks we see above and observe who has the most concentrated exposure there, we see the following...


This article is like deja vu, all over again. First, there is the 2nd lien portfolio that JPM purchased from WaMu, which will be akin to a blood bath - see Reggie Middleton on JP Morgan's "Blowout" Q4-09 Results, Then there are the events of today. I think I was rather accurate in assuming that these loans will take significant chunks out of the companies that own them, even when purchased at 25% discounts.

See Bloomberg: Treasury's Delay Cutting Home-Equity Debt Threatens U.S. Housing Recovery

 an. 19 (Bloomberg) -- The U.S. Treasury Department has failed to win agreements to get struggling borrowers’ home- equity debt reworked, among the biggest roadblocks to reducing foreclosures that may reach a record 3 million this year.

None of the lenders holding a combined $1.05 trillion in the debt has signed contracts requiring participation in the second-mortgage modification plan announced eight months ago. The largest banks remain “committed” to joining, Meg Reilly, a department spokeswoman, said in an e-mail.

President Barack Obama in February announced a $75 billion program to cut first-mortgage payments. The Treasury detailed a plan on April 28 in which second-mortgage owners modify or retire debt when the first lien is changed, saying it would be running in a month. The near-record level of home-equity debt held by lenders including Bank of America Corp. and Wells Fargo & Co. may lead to foreclosures that threaten housing stability after the worst slump since the 1930s.

“The issue of the second liens has to be escalated,” said Richard Neiman, New York’s banking superintendent and a member the Troubled Asset Relief Program’s Congressional oversight panel. The government should consider forcing banks to participate and to recognize the “true value” of second liens, he said.

Bank of America, Wells Fargo, JPMorgan Chase & Co. and Citigroup Inc. carry such mortgages at about $150 billion more than their value, according to estimates by Joshua Rosner, an analyst at Graham Fisher & Co. in New York.

Equity lines and other second mortgages rank junior to typical mortgages, meaning they get wiped out in a foreclosure unless sale proceeds from a seized home exceed the first debt.



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Reggie Middleton

Resident Contrarian Badass at BoomBustBlog (you can call me Editor-in-Chief)...

Disruptor-in-Chief at, where we're ushering the P2P Economy.