Bank of America, which has the biggest home-equity portfolio in the U.S., may post a 6.9 percent decline in first- quarter adjusted profit to $1.62 billion tomorrow, according to analysts surveyed by Bloomberg. The Charlotte, North Carolina- based company had been the nation's largest mortgage lender after buying Countrywide Financial Corp. and had a portfolio of $136.7 billion in home-equity loans at the end of last year, according to a company filing.

About 22 percent of the bank's home-equity loans were actually senior liens at the end of last year, according to a company filing. That compares with about 28 percent at New York- based JPMorgan and 20 percent at San Francisco-based Wells Fargo. The figures at all three banks exclude impaired loans picked up in acquisitions.

Bank of America has identified $4.7 billion of home-equity loans that stand behind a delinquent first, according to a year- end filing, and the total reclassified as nonperformers may be higher than Barclay's estimate, according to Brian Foran, a New York-based analyst at Nomura Holdings Inc. Citigroup moved about 2 percent of its home-equity portfolio, the smallest of the four lenders. At that rate, Bank of America would reclassify about $2.73 billion.

Potential Impact

"I would expect BofA to be in the same ballpark and maybe slightly higher," Foran said. "Given that they had identified and disclosed these loans ahead of time my guess is they will do the same as the others. The only question mark hanging over this issue: is it the last step, or the first step?"

The three companies collectively hold 40 percent of the nation's home-equity loans, according to Fitch Ratings. Wells Fargo, the biggest U.S. mortgage lender, and JPMorgan, the biggest bank by assets, had already set aside reserves for the loans they reclassified as nonperforming, so there was no impact on reported profit, the banks said last week.

The Fed's directive, which reiterated rules in force since at least 2006, isn't enough to mitigate the risk junior loans pose to the banking system, said Rebel Cole, a former Federal Reserve economist and now a finance professor at DePaul University in Chicago.

'No Teeth'

"The guidance has absolutely no teeth," Cole said. "The regulators could simply say, 'We know at least 25 percent of first mortgages are under water, therefore, at least 25 percent of your second liens are uncollateralized and have to be classified as substandard or doubtful.'"

The risk of home-equity loan defaults will increase if real estate prices continue to decline, analysts and economists said. Home values have tumbled by a third since reaching a peak in mid-2006, according to the S&P/Case-Shiller home price index. Diane Swonk, chief economist of Mesirow Financial Inc. in Chicago, estimates home prices will retreat another 3.9 percent this year, which would strip $706 billion from home values.

Fitch estimates 20 of the largest U.S. banks, including units owned by foreign lenders, may face another $110 billion in junior-loan losses under a stressed scenario, according to a Feb. 27 report that cited third-quarter 2011 figures. Bank of America leads the group with $29.1 billion in potential losses, Fitch said.

Default Rates

While equity loans carry a higher risk if they default, delinquencies are lower. In the fourth quarter, 4.08 percent of home-equity loans were missing payments, according to the American Bankers Association in Washington. That compares with 7.58 percent for first-lien mortgages, according to the Mortgage Bankers Association in Washington.