Home Equity Loss Estimates Rattle Chase

February 29, 2008 No Comments »

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Goldman analysts lowered their 2008 earnings estimate for JP Morgan Chase to $3.30 from $3.44 yesterday after the bank warned investors it could lose $450 million on home equity loans during the first quarter alone, according to a report by Marketwatch.

Last quarter, Chase reported $248 million in write-offs tied to home equity loans, up from $150 million in the third quarter and $51 million in the fourth quarter of 2006.

The net charge-off rate climbed to 1.05 percent in the fourth quarter from 0.65 percent in the third quarter, more than quadrupling the 0.24 percent rate in the fourth quarter of 2006.

Now factor in plummeting home prices and high loan-to-value ratios and you’ve got a huge problem, especially with “walking away” becoming all the rage these days.

Chase attributed the escalating losses to an over-reliance on Fico scores and underlying property values, along with layered risk and direct vs. indirect loan origination channels.

About a month ago, the New York-based bank reduced the maximum loan-to-value on second mortgages via the wholesale channel to 85 percent in many areas, while stamping out loans at or above 100% LTV.

According to a slide from Chase’s Investor Day presentation held on Wednesday, the bank originated $48.3 billion in home equity loans in 2007, a slim decline from the $51.9 billion originated in 2006 given the high-risk environment.

And as of the end of January, Chase still had $15.2 billion in CMBS exposure, $6.3 billion in Alt-A exposure, $2.4 billion in subprime and subprime CDO exposure, and $5.4 billion of CDO warehouse and unsold positions.

Shares of Chase were off $1.52, or 3.58%, to $40.92 in late trading Friday, not far from their 52-week low of $37.66.

Below is the delinquency rate chart for home equity loans in Chase’s portfolio:

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(top photo: celinet)

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