by Calculated Risk on 6/08/2008 07:18:00 PM

The previous post excerpted from a Business Week article suggesting Option ARMs are "The Next Real Estate Crisis".

Now, from the Financial Times: Crisis shifts to regional lenders

Home equity loans are rapidly emerging as the next front of the credit crunch, as falling house prices and lax underwriting lead to growing losses for US regional banks that have huge portfolios of such loans on their balance sheets.

The rising defaults on home equity loans, used by people to raise funds by taking out a second mortgage on their houses, underscore how the financial crisis is shifting from big banks’ writedowns on complex derivatives to consumer-related problems for smaller banks.

So is the next crisis Option ARM recasts or HELOCs hitting the regional banks?

The answer is probably both, but in different ways. The Option ARM recasts will lead to more foreclosures, especially in move up areas where the product was very popular, and put more pressure on house prices. HELOC lenders tend to avoid foreclosure, since HELOC lenders frequently experience 100% losses in foreclosure - so the lenders don't bother with the added expense. Instead the HELOC losses will hit the lenders' balance sheets, and will lead to more write-downs and potentially more bank failures.