Reuters Investigates

By Matthew Goldstein

The $425 billion in home equity loans and other second mortgages sitting on the balance sheet of the  four biggest U.S. commercial banks is the big gorilla in the room that no one wants to talk about. (See our latest special report here.)

The banks, for their part, generally have downplayed concerns about so-called second liens on mortgages. Bankers point out that less than 5 percent of home equity loans and other second mortgages are delinquent and lenders have been taking charge-offs for second liens deemed uncollectable.

But critics argue the banks are whistling past the graveyard in dealing with their large exposure to second liens and pinning too much on an economic rebound to keep these loans above water.  The critics say that with so many borrowers underwater on their primary mortgage, it is inevitable that banks will have to take writedowns on home equity loans, especially when the first loans are modified and reduced in size.

The big worry then is that any substantial writedowns by banks could eat away at precious capital they’ve built up since the financial crisis nearly brought many big lenders to the brink two years ago.

Also, housing experts suggest that until banks confront their second lien exposure, it will be hard to craft meaningful solutions to the mortgage mess and stem a wave of  foreclosures on financially-strapped borrowers.

To read the special report in PDF format.

Some nice feedback from the Columbia Journalism Review.