• Agencies Issue Guidance on Reserving for Credit Secured by Junior Mortgages
  • February 20, 2012 | Author: George A. LeMaistre
  • Law Firm: Jones, Walker, Waechter, Poitevent, Carrère & Denègre L.L.P. - Mobile Office
  • The federal financial-services regulatory agencies have released a Supervisory Guidance concerning institutions’ determination of loan-loss reserves for outstanding credit that is secured by junior liens on one-to-four-family residential properties.

    The Guidance, issued jointly by the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the National Credit Union Administration, urges lenders to be sure that they give appropriate attention to home-equity lines of credit, and other mortgage-credit facilities typically secured by junior liens, when evaluating the risk in their portfolios for the purpose of identifying probable losses and determining appropriate levels of loss reserves.

    According to the release, the matters to be considered by institutions in assessing the level of risk in their portfolios should include not only such factors as the borrower’s current credit score, the delinquency and modification status of both the senior and the junior credit, the type of security property and its location, economic and housing market conditions in the relevant areas, the age of the credit, and the current combined-loan-to-value ratio of both the senior and junior credits, but also any default risk that might be associated with changes in the junior credit that result in changes in the payments to be made on the credit, such as a change in the interest rate or the conversion of an interest-only credit to an amortizing loan.

    Several of the concepts that the agencies addressed in their 2005 Interagency Credit Risk Management Guidance for Home Equity Lending, and their 2006 Interagency Policy Statement on the Allowance for Loan and Lease Losses, are reiterated in the current release.

    The Guidance emphasizes the importance, for those institutions that have significant holdings of credits secured by junior liens, of ensuring that they employ adequate segmentation within their junior-lien portfolios to enable them to make appropriate estimates of the reserves required for any high-risk segments in those portfolios.