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Bank of America Has Problems with Home Equity Loans

Posted by: Henry Baum | May 14,2008



As goes Bank of America so goes the economy?  That’s a distinct possibility, as Bank of America is one of the largest banking institutions in the U.S.  This week it has released troubling figures via its home equity loans department.  Bank of America sees greater losses via home equity loans that were projected just three weeks earlier.  

Bank of America’s problems with home equity loans are similar to problems with the subprime mortgage industry.  Homeowners have found in recent months that they cannot handle the burden of  mortgage payments.  However, there is a significant difference between the home equity loan market and the subprime mortgage market. 

Subprime Loans and Home Equity

To be approved for a home equity loan, a homeowner must build up significant equity on a mortgage and then borrow of that dividend.  Though the term “home equity loan” does not sound risky, really this amounts to a second mortgage, as homeowners will have to pay off both the original mortgage and the home equity loan on top of that.  

One of the better ways to use a home equity loan is to put that money right back into home repairs or improvement, improving the value of the home.  Debt repayment is also highly popular and useful, as it can elevate a credit rating for refinancing, and improve savings.  

Subprime mortgages, on the other hand, are a brand new loan, normally with a lot of front-loaded interest.  They’re given to homeowners who may have very little experience paying off such a sizable loan.  Where the two mortgage markets are similar, however, is that banking institutions such as Bank of America got a little too overzealous with how many loans were approved.  The home equity loan boom is now proving to be a drain, as homeowners are finding it increasingly hard to pay off this additional loan during such a difficult economic climate. 

Home Equity and the Credit Crisis

Because of the weakening dollar and mounting debt, consumers are finding it hard to make ends meet.  It can be difficult enough to pay off one mortgage, let alone two separate major loans.  With home values on the decline, increased home equity is more difficult to acquire.  In the past, homeowners may have been able to bank on equity as a significant investment.  Once cashed out, it is becoming increasingly hard for homeowners to build that equity up again.  The result is Bank of America’s troubles: an increasing number of homeowners who are unable to pay off their home equity loans.  

This comes at a time when Bank of America and other banking institutions are already struggling because of the subprime mortgage crisis.  This is especially true for B of A in large states like California and Florida.  Defaults on credit cards are also posing a problem.  Though the credit crisis is projected to come to a close sometime in 2009, issues such as home equity loan delinquencies make the financial healing process that much more difficult.  

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