BofA Sees Higher Losses on Home Equity Loans: Report

Bank of America Corp. (BAC: 15.05 -0.53%) said Tuesday that it now expects losses on home equity loans to reach above estimates offered last month in the company’s first quarter earnings report, suggesting that the credit crunch that hit financial institutions with epidemic force during the back half of last year is now moving towards leveraged consumers as well.

BofA’s Liam McGee, president of the company’s consumer and small business division — 77 percent of the bank’s revenue base in Q1 — said yesterday that the bank now expects losses in its $118 HEL portfolio to top the 2.5 percent ceiling the company estimated in early April. McGee did not provide an estimate of how high the HEL loss rate might actually go, according to Bloomberg News, which first reported on the story.

Home equity lending has proven especially problematic for the Charlotte, NC-based bank during the first quarter. BofA’s allowance for loan losses in home equity lending jumped from $963 million to $2.6 billion in one quarter, as net charge offs rose 177 percent to $496 million. More than $1.78 billion of outstanding home equity loans were nonperforming in Q1, compared to $1.3 billion in the fourth quarter of 2007.

Much of the home equity losses absorbed by Bank of America are stemming from problems in California and Florida, the bank said on it’s April earnings call with analysts and investors. 39 percent of the bank’s HEL portfolio is in these two states, yet they represent they represent more than half of all charge-offs, BofA said.

Rounding out a rather bleak financial picture, McGee also said that the bank observed a “sharp increase” in spending on necessities by its credit-card customers in the past few months, Bloomberg reported.

The eponymous author of the finance & economics blog Calculated Risk speculated Tuesday that the boost in credit spending “is probably part of the reason retail sales (ex-autos) are holding up a little better than expected.”

If the speculation proves true, economic experts that spoke with HW suggested that HEL delinquencies could rise dramatically.

“BofA sits in a relatively good position to assess the overall health of its consumer lending base,” said one analyst, who asked not to be named. “It’s pretty clear that they took a broad look at consumer credit spending trends, and realized it was time to take the hatchet to HELs.”