Four federal financial regulatory agencies on Tuesday reiterated supervisory guidance related to allowance for loan and lease loss estimates associated with junior liens on home mortgages, suggesting renewed scrutiny in this area.
Among details stressed in reiterating the guidance is that financial institutions must monitor “all credit quality indicators relevant to credit portfolios, including junior liens.”
The agencies also noted that, “Institutions with significant holdings of junior liens should also periodically refresh other credit quality indicators that the organization has deemed relevant about the collectibility of its junior liens, such as borrower credit scores and combined loan-to-value ratios, which indicate both the senior and junior liens.
“Institutions should refresh relevant credit quality indicators as often as necessary considering economic and housing market conditions that affect the institution's junior lien portfolio,” the agencies added in their reiterated guidance Tuesday.
In addition to stressing the aforementioned as “responsibilities of management,” the renewed guidance stressed a need for “adequate segmentation” within junior lien portfolios “to appropriately estimate the allowance for high-risk segments” within them.
It noted that among the factors that would be appropriate for doing this would be “delinquency and modification status” of both the junior liens themselves and the senior liens associated with them. Other factors cited as examples included origination channel, documentation type and property type (in terms of whether it is investor owned or owner-occupied).
Also regulators stressed the need for adjustments of historical loss rates for “factors that are likely to cause estimated credit losses as of the evaluation date to differ” from that historical experience.
Finally the guidance reiterated the need to properly record charge-offs, noting, “placing a junior lien on nonaccrual, including a current junior lien, when payment of principal or interest in full is not expected is one appropriate method to ensure that income is not overstated.”
The Federal Reserve, Federal Deposit Insurance Corp., National Credit Union Administration and Office of the Comptroller of the Currency issued the guidance.
