U.S. regulators are examining whether the nation’s home lenders have accurately valued $845 billion of home-equity and other second-lien mortgages, according to seven people with direct knowledge of the matter.
The Federal Reserve and the Office of the Comptroller of the Currency have teams checking on default risks at the biggest banks and whether they’ve set aside enough reserves to cover the loans, according to the people. They spoke on condition of anonymity because the review is continuing and examinations aren’t public.
A slowing economy has cast doubt on the value of second mortgages, whose collateral can be wiped out when home prices decline. The S&P/Case-Shiller index covering 20 U.S. cities has dropped 32 percent from its July 2006 peak, and the jobless rate, stuck above 9 percent, makes it harder for borrowers to keep up with payments. Bank of America Corp. (BAC) and JPMorgan Chase & Co. (JPM) are among the largest holders of second liens.
“If home prices continue to decline and the homes get more and more underwater and you have layoffs, it becomes an ever- bigger issue,” said Laurie Goodman, a senior managing director at Amherst Securities Group LP in New York.
Second mortgages allow borrowers to get extra cash by using the equity in their home as collateral for a loan. When the borrower stops paying or goes bankrupt, the holder of the primary mortgage has first claim on the assets. If the home’s value has fallen since the loan was made, the holder of the second mortgage may be left with little or no collateral to cover losses.
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