Home equity loan crisis is easing, despite headlines

It's not just bad primary mortgages that have gotten homeowners in trouble.

Home equity loans and lines of credit, which soared during the boom times, have now soured to the point that lenders are writing off more of those loans than primary mortgages. If the economy takes a turn for the worse, losses on home equity this year could reach $65 billion, according to one estimate, double last year's write-offs.

The write-offs are putting some delinquent homeowners in the media glare as news outlets, most recently The New York Times, point out how they're refusing to pay outsize home equity loans and lines of credit – or settling with banks for pennies on the dollar.

Underneath those exceptional headlines, however, Americans' debt situation actually appears to be improving. For the first time in two years, delinquencies on home equity loans fell in the first quarter of 2010 to 4.12 percent, down from 4.32 percent in the fourth quarter of 2009, the American Bankers Association reported last month. Delinquencies on home equity lines of credit also fell from 2.04 percent to 1.81 percent during the same period.

The decline in home equity line of credit delinquencies extended into May, Equifax found in a separate report, down nearly half a percentage point from May 2009 but still half a percentage point above the level of May 2008.

Moreover, the losses from such loans don't threaten the banking system overall, according to ratings agency Fitch. Instead, those losses are concentrated in the hands of 20 publicly traded banks. They hold 60 percent of the $842 billion in home equity loans and lines of credit still out there. Their losses on those loans will total at least 4 percent – and up to 8 percent, if the situation really deteriorates, Fitch forecasts.

That's bad, and it may be worse because of coming losses on commercial real estate loans, Fitch warns. But banks have boosted their loan reserves and capital, it points out, in anticipation of such losses.

And overall mortgage debt (including primary mortgages) has been falling since 2008, the Federal Reserve reports.

These are signs that America's mortgage debt crisis is at least stabilizing and, perhaps, beginning to ease.