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 consumerrelated problems for smaller banks.

Mounting losses on home equity loans are likely to deepen the financial woes of many US regional lenders, increasing the risk that one of them might fail and raising the possibility of a wave of emergency mergers in the sector.

Financial Times