Contrarian investors who think now is the time to start buying beaten-down banking stocks could be in for a shock if they don't carefully review those companies' distressed home-equity loan portfolios.

Massive losses tied to subprime-mortgage investments knocked down bank earnings over the last year, spurring investors to flee those stocks. But that could be only the start: Rising delinquencies in home-equity loans and other second mortgages could keep the banks' results from improving anytime soon.

In recent days, executives at Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co. said missed loan payments were a factor in their quarterly earnings declines. Most said the problem would only get worse.

Why? A so-far small, but growing, number of homeowners who used their homes like an ATM to fund their spending and investment bets are finding themselves in a financial pinch.

During the housing boom, many tapped the rising value of their home equity - the difference between a home's market value and what is owed in mortgage debt - to pay bills or tuition, do renovations, go on vacations and more.

Some borrowers also used something known as "piggyback" loans when buying their homes, which let them finance the full value of their house by combining their first mortgage with a home-equity loan. An unknown number of them gambled that they could double down on the housing boom by tapping their equity to buy other homes and condominiums as investment properties.

But the slump in home prices has changed the dynamics of such loans. Nationwide, prices have tumbled 5 percent since the market peak since early 2006, and some estimates say another 5- to 10-percent decline is still to come. The pullback has been more pronounced in some parts of the country, like southern California where prices are off more than 15 percent since the downturn began, according to DataQuick Information Services.

That means many homeowners may owe close to - or more - than the actual value of their homes. In the lending business, that "loan-to-value ratio" is closely watched, and when it gets above 90 percent, there is a greater tendency for borrowers to just walk away.

"Borrowers are seeing themselves get turned upside down, and then they stop paying," said Mike Larsen, real estate analyst at Weiss Research Inc. in Jupiter, Fla. "A lot of lenders underestimated the risk of these borrowers because they did not count on home prices dropping so steeply."

Some bank executives are playing the blame game for how these troubled loans got on their books. Many say that the most problematic loans weren't originated by their own underwriters but by outside brokers who were more tolerant of risk.

Regardless of how they got there, they're a problem. At Citigroup, the delinquency rate on its $63 billion second-mortgage portfolio jumped to a historic high of 1.38 percent in the fourth quarter. A year ago, the delinquency rate on these kinds of loans that were at least 90 days past due was 0.3 percent.

The delinquency rate shot to 2.48 percent for borrowers with loan-to-value ratios of 90 percent or more.

Those late payments contributed to sharply higher credit costs at Citigroup. It took a pre-tax $2.42 billion charge in the fourth quarter to build its reserves to cover anticipated losses in the coming months. Overall, Citigroup lost $9.93 billion in the final quarter of 2007, its weakest performance in its 196-year history.

The problem for Citigroup and other banks is that "second mortgages are much more likely to go directly from delinquency to charge-off without going into foreclosure," said Citigroup CFO Gary Crittenden during the company's earnings conference call with analysts on Tuesday, according to a transcript provided by Thomson Financial.

That often happens when first and second mortgages are owned by different lenders, making it more difficult to renegotiate the terms of the loan. If a second mortgage holder wants to foreclose because the borrower is delinquent, the owner of the first mortgage would have to be bought out. When home prices are depreciating, there may be no value to that proposition.

JPMorgan Chase CEO Jamie Dimon also cited worse-than-expected results in home-equity loans as a contributor to the bank's 34 percent profit decline in the fourth quarter to $2.97 billion. Home equity net charge-offs were $248 million, or a rate of 1.05 percent, in the fourth quarter, compared with $51 million, or a 0.24 percent net charge-off rate a year ago.

The bank has home-equity loan exposure on its books of $95 billion, and estimates its write-off rate could peak at around 1.55 percent to 1.6 percent. In the fourth quarter, it took a charge of $395 million to build its home-equity loan-loss reserves.