HELOC Growth Worries OCC

Federal banking regulators are getting nervous about the "extraordinary" growth of home-equity lending at a time when interest rates are starting to rise and home price appreciation is expected to slow.

The Office of the Comptroller of the Currency is concerned that national banks are easing their underwriting standards due to competitive pressures in the industry.

This easing is evident in home-equity lines of credit and first mortgage loans, such as "interest only" loans, acting comptroller of the currency Julie Williams told a Bank Administration Institution meeting in New York.

"We have stressed that active portfolio management is especially important for lenders who have experienced or project significant growth, particularly in higher-risk products such as higher LTV loans, limited or 'no doc' loans, prolonged interest-only products and loans generated by third parties," she said. (Third parties generally refer to mortgage brokers.)

OCC is planning to issue guidance on managing risk on these home-equity loans soon. OCC also is concerned about the rapid growth of HELOCs, particularly when these lines of credit are extended to borrowers with interest-only and no-doc loans.

"Today, delinquency and loss rates for home-equity loans and HELOCs are low, but we have concerns that rapid growth, historically low interest rates, and changes in the structure of home-equity products could mask embedded credit risk in these portfolios," the acting comptroller said.

"The comptroller is not against these loan products," an OCC spokesman said. But she wants national banks to review their underwriting standards and risk management practices.

The Federal Deposit Insurance Corp. also is raising concerns about the rapid increase in HELOC borrowing.

The FDIC recently reported that consumers tapped their HELOCs for $44 billion in the third quarter. HELOC borrowings at FDIC-insured banks and thrifts totaled $459.8 billion as of Sept. 30, up 46% since the third quarter of 2003.

In a recent assessment of the U.S. consumer sector, the FDIC noted that current low interest rates, double-digit house price appreciation and bank advertising campaigns are encouraging consumers to draw against their existing lines of credit.

However, many HELOC products have been "untested by a general turndown in the housing market," the FDIC outlook report says. And lenders need to review their loss projections.

"To the extent possible, it makes sense in this environment to estimate how loss projections might change under a less advantageous set of market conditions," the FDIC report says.

Meanwhile, OCC examiners are finding that banks are using credit scores to evaluate their HELOC portfolios instead of assessing the borrowers' ability to repay the loans.

"We urge bank management to regularly assess the vulnerability of their bank's portfolio to changes in the consumers' ability to pay and potential declines in home values," the acting comptroller told the BAI conference.

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