Kip Tip: Prepay your mortgage?

This morning, the central bank announced further measures to address the liquidity problems facing financial institutions caught up in the mortgage mess. The Fed said it will lend up to $200 billion to securities dealers for periods as long as four weeks, rather than overnight, which is the current policy.

Stocks rallied on the Fed move. At 11:30 a.m. ET, the Dow Jones Industrial Average was up 216 points to 11,956 after losing 153 points on Monday. As of Monday’s close, the Dow had lost 546 points, or 4.3%, this month and had shed 11.5% for the year.

This morning, the Nasdaq Composite Index had gained 44 points to 2,214, and the Standard & Poor’s 500 Index had added 22 points to 1,296.

More and more lenders are offering home equity lines of credit. By using the equity in your home, you may qualify for a sizable amount of credit, available for use when and how you please, at an interest rate that is relatively low. Furthermore, under the tax law–depending on your specific situation–you may be allowed to deduct the interest because the debt is secured by your home.

It’s a tricky market so watch your back and don’t get sucked into a line of credit you can’t repay.  No one wants to lose their house and these types of loans may seem enticing but the economy is not headed in the right direction.  Get all the facts before you sign anything!

A home equity loan (sometimes abbreviated HEL) is a type of loan in which the borrower uses the equity in their home as collateral. These loans are sometimes useful to help finance major home repairs, medical bills or college education. A home equity loan creates a lien against the borrower’s house, and reduces actual home equity.

Home equity loans are most commonly second position liens (second trust deed), although they can be held in first or, less commonly, third position. Most home equity loans require good to excellent credit history, and reasonable loan-to-value and combined loan-to-value ratios. Home equity loans come in two types, closed end and open end.

Both are usually referred to as second mortgages, because they are secured against the value of the property, just like a traditional mortgage. Home equity loans and lines of credit are usually, but not always, for a shorter term than first mortgages. In the United States, it is sometimes possible to deduct home equity loan interest on one’s personal income taxes.

As home sales and prices continue to slide the news continues to worsen for home owners and property owners everywhere.  Now a necessary part of many people’s incomes and buying power is being completely eliminated.  When will economists and bankers realize that fast fixes via interest rates from The Fed aren’t going to cut it.  We need ound economic policies from the top down that encourage not just consumer confidence but consumer purchasing power.

It’s all about disposable income folks.  You have it or you don’t.  Personally, I dispose of mine in my gas tank.

NEW YORK (MarketWatch) — Is home equity the new subprime? Goldman Sachs may think so — the brokerage lowered its 2008 earnings estimate for JP Morgan Chase & Co. to $3.30 from $3.44 Thursday amid warnings that problems in the bank’s home equity loan portfolio could cost it $450 million, more than twice previous estimates.

A team of Goldman (GS) analysts headed by William Tanona made the predictions in a note to investors.

JP Morgan (JPM) was down more than 2% in early trading Thursday.

“Home equity losses will be [JP Morgan]’s most significant headwind,” the Goldman analysts said, citing plummeting housing prices and skyrocketing negative equity as major concerns for the bank in coming months.

Goldman retained a “neutral” rating on the stock. Merrill Lynch and Co. (MER) also trimmed its earnings target for JP Morgan Thursday, to $3.83 from $4.07.

The analysis followed JP Morgan’s annual investor day, which was held in New York City Wednesday. The day saw presentations about the bank’s bottom line from JP Morgan CEO Jamie Dimon, Chief Financial Officer Mike Cavanah and the bank’s six business unit chiefs.

The headline-making news out of the meeting was Cavanah’s disclosure that JP Morgan could lose $450 million on home equity loans during the first quarter alone, more than double what it had originally predicted.

JP Morgan’s home-equity related losses ballooned more than 65% during the fourth quarter of 2007 to $248 million, a severe spike from $150 million a scant year earlier.

Goldman analysts took particular notice of that leap in their note Wednesday.

“Management estimates that potential losses on its home equity portfolio could be $2.0-2.5 billion if national house prices fall 5% in 2008 and $3.2-3.7 billion if house prices fall 10%,” Goldman wrote. “We increased our loan loss estimate and provision in 2008 to the high end of this range in light of our views that US house prices will fall an additional 12-13%.”

Negative equity, too, remains a concern. As the bottom continues to fall out of the nation’s real estate market, many homeowners have found themselves holding loans worth far more than their home’s new, much lower value.

“With 10% of its home equity portfolio having a CLTV greater than 100% (negative equity), the charge-off rate could go as high as 4% if house prices decline 10% nationally,” Goldman said.

Analysts also stressed that prime borrowers, too, are feeling the pinch of a weakening economy and faltering housing market. Prime borrowers with loans worth more than 95% of their home’s value are defaulting at much higher rates, accounting for more than 4.3% of JP Morgan’s total loan losses in the fourth quarter.

“These loans have been the primary driver of losses within home equity – about 60% of [fourth quarter] losses came from loans with a CLTV greater than 100%. California accounts for the largest percentage of no-equity loans, followed by Florida, Arizona and Michigan,” Goldman said.

Those types of losses are beginning to be felt across all loan ages, the brokerage cautioned, a possible harbinger of troubles to come.

“Contrary to some beliefs, home equity losses are also being experienced in earlier vintage years,” Goldman said, adding that there is little change in loan loss rates for home equity loans where the first lien is held by JP Morgan or a separate bank.

“Cumulative loss rates in home equity have risen sharply on a number of vintages including those prior to 2006, and the data shows no signs of abating any time soon,” analysts wrote.

The outlook for consumer credit remained grim as well, as many borrowers struggle to cope with new resetting loan terms by depending more and more on credit cards–often causing a major uptick in payment delinquencies.

“[JP Morgan], as well as the rest of the credit card industry, has enjoyed a benign credit environment in recent years,” Goldman said. “However, indications from management suggest that net charge-offs are moving higher and they reiterated that the charge-off rate is likely to approach 4.5% in [the first quarter] and could climb to 5% in the back half of the year.”

As a result, Goldman said it expects to remain cautious on further consumer credit predictions for the bank in the coming quarters.

Goldman and Merrill are only the two latest brokerages to raise alarm bells about further writedowns in the banking sector — Citigroup (C) analysts said Wednesday that they predict Bank of America Corp. (BAC) , Wachovia Corp. (WB) and JP Morgan to report billions more in losses in the first quarter.

The price tag for JP Morgan? It could be as much as $1.44 billion in losses for additional leveraged loans and investments related to mortgage-back securities, Citi said