California homeowners might be seeing another $10,000 tax credit offer soon. Despite the economic woes of the state, the governor has signed a bill offering this tax credit to home buyers.

Is this sound business judgment? California has a $20.7 billion deficit in the general fund budget over the next 16 months and owes $8.8 billion in short-term loans that have to be paid off by June. There is an additional $120-plus billion in outstanding bonds and interest that will be paid over decades. The state’s pension fund, CalPers, has $16.3 billion more in liabilities than assets plus California also faces a $51.8 billion for the health and dental benefits of state retirees and future retirees.

The bottom line for California, is that it has the lowest credit rating of any state in the nation, just above junk bond status. One major problem is the rise in California’s debt-service ratio (DSR). That is, the ratio of annual general fund debt–service costs to annual general fund revenues and transfers.

This is often used as one indicator of the state’s debt burden. The higher it is and more rapidly it rises, the more closely bond raters, financial analysts, and investors tend to look at the state’s debt practices, and the more debt–service expenses limit the use of revenues for other programs. Debt servicing is projected to comprise 9% of general fund revenues by the end of 2014-15. According to Bloomberg News, the market believes a developing country like Kazakhstan, with about 15.7 million people, is less likely to default on its debt than California, which is the eighth largest economy in the world.

Despite the economic woes of the state, the new (some say extension of the 2009 new home credit) bill, AB 183 will provide $200 million for home buyer tax credits, allocating $100 million for qualified first-time home buyers of existing homes and $100 million for purchasers of new, or previously unoccupied, homes.

The eligible taxpayer who purchases a qualified personal residence on and after May 1, 2010, and on or before Dec. 31, 2010, or who purchases a qualified principal residence on and after Dec. 31, 2010, and closes the sale before Aug. 1, 2011, will be able to take the allowed tax credit. The credit is equal to the lesser of 5 percent of the purchase price or $10,000, in equal installments over three consecutive years. Purchasers will be required to live in the home for at least two years or forfeit -repay the credit. (Before acting on this preliminary information for the tax credit, one should first consult your legal/tax professional.)

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Lovely 2 bedroom, 2 bathroom duplex condominium in Dearlove Cove.  Unit features hardwood flooring and balcony with eat in kitchen.  Bring your buyer today and see this wonderful condo.  Buyer responsible for any/all compliances, escrows etc if required. All inspections/systems tests are at buyer’s expense. Offers require pre-approval & EM due in certified funds at acceptance. Addendum required after seller accepts offer. Cash deals require proof funds. Buyer to verify room count, PIN #’s, zoning, schools etc. View the many pictures we have to offer at www.illinoisforeclosuredeals.com and call today to schedule a viewing of this property at 847-967-0022. This listing is exclusively represented by the Helen Oliveri Team of Keller Williams Realty.

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Large 3 bedroom 3.5 bathroom townhome with attached 2 car garage.  This home has many wonderful features such as 2 fireplaces, 2^nd floor laundry, balcony, and patio.  This newer construction home has an oversized kitchen with granite counters, island, and stainless steel appliances.  Also, a stunning living room with fireplace and dining area as well and full finished walkout lower level with fireplace. Space in this townhome is not an issue.  Come and see all the wonderful features this home has to offer.   Visit this home and many others at www.helenoliveri.com and make this home your best move today. This property is exclusively represented by The Helen Oliveri Team of Keller Williams Realty.

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April 12 (Bloomberg) — Bank of America Corp., JPMorgan Chase & Co. and Wells Fargo & Co. may have to set aside an additional $30 billion to cover possible losses on home-equity loans, an amount almost equal to analysts’ estimates of profit at the three banks this year.

The cost of these reserves was calculated by CreditSights Inc., a New York-based research firm whose prediction almost four years ago proved prescient after banks reported unprecedented mortgage-related writedowns. Recognizing the home- equity loan losses is unfinished business from the housing bubble, CreditSights said in a March 29 report.

Potential writedowns on the loans are casting a shadow over earnings, as analysts try to determine how much, and how quickly, loan-loss expenses will decline from the industrywide peak reached in June 2009. Banks led by New York-based JPMorgan begin reporting first-quarter results this week.

“While a lot of people are looking for dramatic improvement in the short term, one area that still has to be worked through in a material way is home equity,” said Baylor Lancaster, senior bank analyst at CreditSights in Miami.

The process will take months, and write-offs won’t hit financial statements until later this year, Lancaster said.

Second-Lien Mortgages

Action in Washington could spur banks to act. U.S. Representative Barney Frank, chairman of the House Financial Services Committee, is scheduled to hold a hearing tomorrow on how second-lien loans are getting in the way of reworking homeowners’ debts and easing the foreclosure crisis. Frank sent a letter March 4 asking banks to recognize more losses in order to clear the way for mortgage modifications.

Second-lien mortgages and most home-equity lines of credit rank behind first-lien debt, meaning they get wiped out in a foreclosure if the sale of a home doesn’t raise enough to pay off the first mortgage. Second liens are often closed-end loans in contrast to home-equity lines of credit, which can remain open for borrowers to withdraw money when needed, much like a credit card.

In many cases, first mortgages can’t be modified or written down because lien priority dictates that junior loans be erased first. Few lenders have agreed to reduce or extinguish home- equity loans when modifying mortgages, even if a property is worth less than what’s owed, according to a report by Troubled Asset Relief Program Special Inspector General Neil Barofsky.

Bank of America

The four biggest U.S. banks by assets — Bank of America, JPMorgan, Citigroup Inc. and Wells Fargo — hold about 42 percent, or $442 billion of the $1.1 trillion in second-lien mortgage loans, according to Amherst Securities Group LP, an Austin, Texas-based firm that analyzes home-loan assets.

Late payments on home-equity loans rose to a record in the fourth quarter, the American Bankers Association said April 7.

“Banks have been saying we’re close to the end,” said Nancy Bush, an independent bank analyst at NAB Research LLC in Annandale, New Jersey. “People have built that into their expectations. I don’t think we’re there yet.”

Bank of America, the biggest home-equity lender in the U.S., may report April 16 a first-quarter profit of 10 cents a share compared with a fourth-quarter per-share loss of 52 cents, according to the average estimate of 20 analysts surveyed by Bloomberg. Wells Fargo, the biggest U.S. mortgage lender, may increase its earnings per share in the first quarter to 42 cents when the San Francisco-based company reports results April 21, estimates show. That would be more than five times the amount for the previous quarter.

Record Allowances

One reason for the optimism is that banks have already booked large loan-loss expenses, which can be used to absorb additional writedowns without subtracting from earnings. Any reduction in loan-loss expenses will boost earnings, analysts and investors say.

These accounting entries, called allowances or reserves, reached a record 3.7 percent of total loans in December, more than twice the average level since 1948, according to Moody’s Investors Service.

Christopher L. Henson, chief operating officer of Winston- Salem, North Carolina-based BB&T Corp., the 10th-largest bank by assets, said March 1 that the bank’s reserve coverage has likely peaked.

“The majority of banks last year saw the pace of reserve build slow,” said Jason M. Goldberg, a Barclays Capital senior analyst in New York. “That trend continues amid signs of stabilization in delinquency trends and an improving economy.”

Bank Stocks Rally

Investors have pushed up the price of financial stocks on the belief that the biggest loan losses are in the past and that banks will begin to restore dividend payments and buy back shares. The 24-company KBW Bank Index jumped 22 percent in the first three months of this year. The Standard & Poor’s 500 Financials Index rose 11 percent in the first quarter, while the broader S&P 500 was up by 4.9 percent.

The stocks of the four largest banks are among the best performers in the S&P 500 since the market reached its nadir March 9, 2009. Each ranks in the top 25 percent.

JPMorgan rose 12 cents to $46.10 at 9:43 a.m. in New York Stock Exchange composite trading. Bank of America advanced 13 cents to $18.72, Wells Fargo gained 25 cents to $32.55 and Citigroup climbed 8 cents to $4.63.

Whether banks will feel confident enough about the creditworthiness of their borrowers to draw down allowances this year is the focus of a disagreement about bank earnings. Analysts at Credit Suisse Group AG say that some lenders will start releasing reserves in the second half of this year. That could make profits surge and fortify balance sheets.

‘Little Recovery’

Joseph Pucella, an analyst at Moody’s in New York, said he expects banks to keep reserves topped off “at least through the end of the year” because they still face losses.

Second-mortgage loans are shaping up to be a big bump in the road, said Paul Miller, an analyst at FBR Capital Markets in Arlington, Virginia, and a former bank examiner.

“There’s very little recovery for home-equity loans,” Miller said.

The interest in second-lien loans comes after U.S. banks and brokers have taken $294.6 billion in losses related to credit costs, loan write-offs and increased provisions, according to Bloomberg data. Investors may still lack confidence that banks have shown them the worst of second-lien loans, said Jack Ablin, chief investment officer at Chicago-based Harris Private Bank, who oversees $55 billion.

JPMorgan Reserves

JPMorgan Chief Executive Officer Jamie Dimon told investors in the bank’s annual report published in February that quarterly writedowns for home-equity lending “could reach $1.4 billion” in 2010. That would produce record write-offs of $5.6 billion this year, 19 percent more than in 2009 and more than double the amount in 2008.

The bank’s home-equity losses will be three times higher than in normal times, analysts at Deutsche Bank Securities said in an April 1 report.

JPMorgan has earmarked $13.8 billion of loss reserves for the division holding all of its mortgages, the annual report said. The bank holds $101 billion of home-equity loans, the third-largest amount of any U.S. bank, and about 1.6 percent of its second-lien loans are nonperforming, according to data compiled by Bloomberg.

JPMorgan shares would be trading higher if not for its home-equity loans, Christopher Whalen, a bank analyst at Torrance, California-based Institutional Risk Analytics wrote in a March 22 note.

‘Not Going Away’

After factoring in reserves already set aside to cover second-lien losses, the CreditSights team, led by senior analyst David A. Hendler, calculated that if JPMorgan were to write down 40 percent of its loans in which borrowers owe more than their property is worth, it would reduce earnings by $9.6 billion after taxes, or $2.41 a share. CreditSights didn’t specify over what period of time those losses might be taken.

The bank is expected to earn $14.1 billion in 2010, according to the average estimate of 13 analysts surveyed by Bloomberg. In 2009, it earned $11.7 billion.

“This is a problem that’s not going away for several years,” Charles W. Scharf, JPMorgan’s head of retail financial services said at a Feb. 25 investor conference.

Jennifer Zuccarelli, a spokeswoman for JPMorgan, declined to comment.

Bank of America, based in Charlotte, North Carolina, holds $138 billion of home-equity loans. About $112 billion, or 81 percent, are second liens. The bank almost doubled its allowance for losses on the loans in 2009 to $10.2 billion from $5.39 billion the previous year. It wrote off $7.1 billion last year, up from $3.5 billion in 2008.

Wells Fargo

If Bank of America were to write off 40 percent of the loans to its underwater borrowers, net income would drop $7.4 billion, or 74 cents a share, CreditSights said. Bank of America is expected to earn $10.7 billion in 2010, according to the average estimate of 13 analysts surveyed by Bloomberg.

Wells Fargo holds about $123.8 billion of home-equity loans, with about $103.7 billion in a junior-lien position, according to company filings. The lender has $5.3 billion in reserves set aside to cover the second-lien mortgage loans and wrote off $4.6 billion last year. Almost 2.2 percent of the second liens are more than 120 days past due, the company said in its annual report.

CreditSights said potential home-equity losses could knock $12.8 billion, or $2.47 a share, off earnings at Wells Fargo. That’s more than the $10.9 billion the bank is expected to earn this year, according to the average estimate of 15 analysts surveyed by Bloomberg.

$100 Billion Shortfall

Citigroup has the smallest home-equity portfolio of the four biggest banks with $49.4 billion, according to CreditSights. About 3 percent of its second-lien mortgages were 90 days past due at the end of last year, according to a presentation on the bank’s Web site. The New York-based lender could face home-equity losses of $3.4 billion, or 12 cents a share, CreditSights said in its report.

Bank of America spokesman Scott Silvestri and Citigroup spokeswoman Natalie Riper declined to comment. Mary Berg, a Wells Fargo spokeswoman, said the bank is awaiting government data about second liens that are eligible to be modified.

Second-lien reserves set aside by the four big banks are $100 billion to $125 billion short of what’s needed in the next few years, said Joshua Rosner, an analyst at Graham Fisher & Co., an independent research firm based in New York, and co- author of a May 2007 report that said ratings companies were underestimating the risk of subprime-mortgage bonds.

“If banks were properly accounting for their second liens, there would be no problem with them choosing to do principal writedowns,” Rosner said in a phone interview. “They would already be reserved for it.”

Frank Letter

About 24 percent of homeowners own more on mortgage loans than their houses are worth, according to First American CoreLogic Inc., a San Francisco-based provider of mortgage data and analytics. Those people are increasingly likely to give up their homes to foreclosures, slashing the value of associated second-lien loans, Frank said in his March 4 letter.

“Large numbers of these second liens have no real economic value — the first liens are well underwater and the prospect for any real return on the seconds is negligible,” Frank wrote.

The banks have been slow to take writedowns on second liens since many borrowers keep paying, even if their primary mortgage is underwater. Eighty percent of home-equity borrowers who owe more than 100 percent of the value of their homes continue to pay on time and in full, Bank of America CEO Brian T. Moynihan said at a March 10 investor conference.

‘Inappropriate Application’

The chance that banks will write off 100 percent of such loans is “minimal,” CreditSights said. That’s why the firm assumed write-offs of 40 percent of the worst loans when estimating the potential hits to bank earnings.

The Federal Deposit Insurance Corp., which oversees U.S. commercial lenders, asked banks in August to consider boosting reserves for potential losses on home-equity loans.

“Failing to properly consider the current effect of more senior liens on the collectability of an institution’s existing junior-lien loans is an inappropriate application” of accounting principles, the FDIC said in an Aug. 3 letter to banks and examiners.

Just over half of first mortgages have second-lien loans behind them, according to a Jan. 29 report by Laurie Goodman of Amherst Securities. Those loans add more than 20 percent of the value of the property to the amount owed.

Potential losses might be mitigated if regulators allow the banks to account for second-lien losses over time, avoiding a sudden hit to their balance sheets, Goodman wrote.

Mortgage Modifications

Frank’s letter and congressional hearing are part of a renewed effort by the government to get the banking industry to modify mortgages so borrowers can afford to keep their homes. Initial modifications focused on reducing required monthly interest payments without reducing the total amount owed.

The Treasury Department announced on March 26 a plan to encourage banks to modify or write down principal on second mortgages in exchange for cash incentives. The plan is tied to the Home Affordable Modification Program, which was designed to ease the burden of first mortgages. All four banks signed on to the second-lien program, which isn’t mandatory. Bank of America said April 9 it started implementing the plan, and Citigroup said the same day it would do so in late summer.

“The banks are saying that they can work through it,” Lancaster said. “Our view is that it may be bigger than they are letting on.”

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The rich and famous now have something in common with hundreds of thousands of middle and lower-class Americans: The bank is about to take their homes.

Houses with loans of $5 million or more will likely see a sharp rise in foreclosures this year, according to a RealtyTrac study for The Wall Street Journal.

Just this week, a Tudor mansion in Bel-Air belonging to film star Nicolas Cage was in foreclosure auction and reverted to the lender. On Wednesday, Richard Fuscone, a former top Wall Street executive, declared personal bankruptcy, forestalling a foreclosure auction that had been scheduled this week on his 14-acre Westchester mansion. Last month a Manhattan condominium owned by Italian film producer Vittorio Cecchi Gori was sold in a foreclosure auction for $33.2 million.

In February alone, 352 homes nationwide in this category were scheduled for foreclosure auction, the final step before a bank acquisition. That is the largest monthly number of these so-called notices of sale since the financial crisis began. By comparison, in all of 2009, there were 1,312 such notices.

Economists say the super-wealthy are among the last to lose their homes in a mortgage crisis because they usually have high savings, better access to credit and other means for staving off foreclosure. But many of them work in financial services and other industries hit especially hard by the crisis, and have seen their wealth shrink in the market crash.

While the numbers are modest compared with foreclosures at other income levels, they suggest the possibility of a sudden spike in bank takeovers of the wealthiest Americans’ property. Typically half the notices of sale result in homes being turned over to creditors, though the figure could be slightly lower for the richest Americans who have more financial options, according to Daren Blomquist at RealtyTrac.

Big borrowers are more likely to default than ordinary people, according to data from First American CoreLogic. Its loan database, reflecting more than 80% of the overall home-loan market, includes 1,700 loans with balances of $4 million or more. About 14.8% of those loans were 90 days or more overdue at the end of January, compared with 8.7% for all home loans tracked by First American. Sam Khater, a senior economist at First American, said the bigger borrowers may be more prone to stop making payments when they have lost all their home equity.

Mr. Fuscone, Merrill Lynch’s one-time head of Latin America, put his mansion up for sale in November, asking $13.9 million. But he couldn’t find a buyer.

The court had scheduled a foreclosure auction for Thursday for the 18,471-square-foot mansion—with two swimming pools, two elevators, six fireplaces, 11 bathrooms and a seven-car garage. The personal bankruptcy filed in U.S. Bankruptcy Court Wednesday temporarily freezes the foreclosure process.

Reached by phone, Mr. Fuscone declined to comment. Brokers and real estate tracking companies say that his home is one of the most expensive properties to face foreclosure proceedings yet.

The phenomenon is not limited to the New York area. Banks have taken over homes with loans of $5 million or more in Georgia, North Carolina and Colorado, RealtyTrac says.

Mr. Cage had tried to sell his 11,817-square-foot Bel-Air property for $35 million but failed to get any offers, said James Chalke, a real-estate agent who had the listing. At a foreclosure sale Wednesday, the property attracted no bids from investors and so was acquired by the foreclosing lender. Annett Wolf, a spokeswoman for Mr. Cage, said he had no comment.

A representative of Mr. Cecchi Gori, producer of more than 200 films including “Il Postino” and “Life is Beautiful,” said his financial situation is improving.

In Florida’s Miami-Dade County, the three largest foreclosure filings initiated against homes in the past six months involved a 4,655-square-foot home in Sunset Islands; a 8,443-square-foot house in Coral Gables; and a condo in Miami Beach, according to Peter Zalewski, a principal of Condo Vultures. All three had mortgages of $3.5 million to $4 million.

Mortgage defaults began to surge in late 2006, mostly among borrowers with subprime mortgages, those for people with weak credit records or high ratios of debt to income.

Over the next few years defaults spread rapidly to better-heeled borrowers, especially those who got loans without documenting their income. At the end of 2009, nearly eight million households, or 15% of those with mortgages, were behind on mortgage payments or in the foreclosure process.

Wealthy people have the means to stretch out the distress process, sometimes for years.

“It’s very, very difficult for these people to believe they’ve had such a severe reversal of fortune,” says Maggie Navarro, a real-estate agent in Pasadena, Calif.

Marc Carpenter, a San Diego-based foreclosure specialist, adds that while it’s much harder for potential buyers to get loans, there are also fewer buyers who can pay for top-dollar properties. “The upper end is definitely a lagging indicator,” he says.

In his bankruptcy filing, Mr. Fuscone provided a list of his debts, including ones to the Greenwich Country Day School, American Express, Mercedes-Benz, a local hardware store, a pet store, and Richards of Greenwich, a fine-clothing store.

“My background is in the financial-services industry and I have been personally devastated by the financial crisis which came to a head in March 2008,” Mr. Fuscone said in his bankruptcy declaration. “I have been sued by Patriot National Bank” as part of a foreclosure action. “I currently have no income for the 30-day period” following his bankruptcy petition.

C.W. Kelsey, owner of Greenwich Hardware, was among the local merchants owed money by Mr. Fuscone, though he wouldn’t say how much.

“Traditionally, the majority of our credit problems were contractors,” he said. “Now there are people you’d never expect two or three years ago to have problems, who live in multimillion dollar homes.”

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