Mortgage Cramdowns To Wreak Havoc -- Analyst

Despite the hope that mortgage cramdowns might mitigate foreclosures, there’s a growing chorus concerned about the effect that such moves will have on financial firms. Last week we noted several points of concern, including the fact that Federal Housing Administration insurance doesn’t cover bankruptcies.

FBR Analyst Paul J. Miller sounds another warning about the plans in a note this morning:

The most obvious negative impact should be felt by owners of large second-lien (home equity line of credit, or HELOC) portfolios, as the second-lien position would most likely be wiped out by a bankruptcy judge in the modification process. A spike in bankruptcy filings would also cause a surge in credit card losses, as lenders are required to charge off the account upon receipt of the bankruptcy notice. Banks with large HELOC and consumer portfolios include U.S. Bancorp, Bank of America, and Citigroup . Large credit card lenders include Capital One Financial, American Express, and Discover Financial Services.

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