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Home-Equity Loans Weigh on JPMorgan

The banking giants says it likely will charge off $450 million in the first quarter.

JPMorgan Chase's

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roughly $95 billion home-equity portfolio remains a source of trouble for the banking titan.

Executives at its investor day on Wednesday said the New York-based bank would likely charge off $450 million in home-equity loans in the first quarter as a result of declining home prices and rising borrower defaults. That figure could possibly double by the end of the year, the executives said.

JPMorgan Chase charged off $564 million in home-equity loans for all of last year -- nearly half of which was taken in the fourth quarter -- according to presentation materials.

Charlie Scharf, JPMorgan Chase's head of retail, said in a presentation that loss rates in some of the more "highly leveraged" categories such as home equity, are some of the worst seen in years -- if ever.

"These losses are well beyond what we would have modeled, and continue to get worse," Scharf said.

"We've never seen this amount of housing correction take place," nor has the company experienced such a large amount of borrowers "without equity" built up in their homes, he said.

He estimates that about 10% of JPMorgan Chase's home-equity borrowers are in a "negative equity position."

JPMorgan Chase has for the most part avoided the large writedowns to collateralized debt obligations and billions in credit costs crippling banks like


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Washington Mutual

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amid the ensnarled housing crisis and ongoing credit crunch.

Home-equity lending, however, has been a trouble area for the company. JPMorgan Chase has repeatedly acknowledged mistakes were made in originating certain riskier loans -- particularly those loans made through brokers that required little documentation requirements.

The company has been pulling back the reins on home-equity originations and tightening lending policies in all mortgage categories in addition to home equity.

Last year, the bank made $16.7 billion of direct-to-consumer home equity originations and an additional $11.3 billion through brokers. Scharf expects home-equity originations to be roughly half the amount in 2008.

"We're going to do substantially less business here," yet over time, the business that is done will have "substantially higher" returns, Scharf said.

Earlier this month, Chase

further tightened its lending policies on home-equity loans made through brokers.

The company said in an internal memo that it would no longer make home-equity loans in which the so-called combined loan-to-value ratio of a borrower's first mortgage (which may not necessarily be a loan made by Chase) and the home-equity loan is equal to 100% or greater than the value of the home. It also placed a cap of 90% in most areas on the maximum loan-to-value ratio that the bank would be willing to fund.

Other banks and lenders are also scaling back on their home-equity and other mortgage lending policies as a result of the drastic home-price declines and mortgage deterioration.

SunTrust Banks

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said in a memo last week that it is

eliminating its combo or "piggyback" loan program, which is a package of first and second mortgages for borrowers that are unwilling or unable to put down 20% on the purchase of a home.