Federal banking regulators Tuesday issued new guidance to ensure that depositories are properly estimating potential losses on second mortgages and home equity lines of credit.
Of course, the guidance comes at a time when many depositories have either eliminated second lien lending entirely, or scaled way back.
The language issued Tuesday afternoon is particularly directed at banks with large holdings of second liens: Wells Fargo and Bank of America being at the top of the list. And it comes after examiners found "deficiencies" in the way banks estimate the performance of second liens and determine their allowances for loan losses.
"Accordingly, the agencies wanted to clarify their expectations for the practices that an institution should be applying when determining the loan loss allowance for its junior lien portfolio to ensure that the level of the allowance is appropriate," a Federal Deposit Insurance Corp. official said.
One industry source noted that a lot of the piggy-back second liens made during the housing boom are now 6-8 years old and regulators are concerned about the collectability of those loans.
In addition, regulators could be concerned about payment shock as interest-only second liens become fully amortizing, the source said.
The guidance directs banks to update their information on the collectability of the seconds and the delinquency status of the related first mortgages.
"Management also should ensure income recognition practices related to junior liens do not overstate income and charge-offs are taken in accordance" with established credit classification and account management policies, the guidance says.
