FDIC warns U.S. banks they may need more home-equity reserves

August 4, 2009

By Jonathan Stempel
NEW YORK, Aug 3 (Reuters) – A U.S. regulator said on Monday banks may need to boost their reserves for losses on home equity loans, after housing prices fell by roughly one-third from their 2006 peak.

In a letter to banks and examiners, the Federal Deposit Insurance Corp urged lenders to consider such factors as whether customers have borrowed more than their homes are worth, or modified their first mortgages.

Also critical is the impact of foreclosures by more senior lenders, especially where home values have fallen so much that more junior lenders might not be repaid, the FDIC said.

Banks held a record $674.3 billion of home equity loans on their balance sheets as of March 31, the FDIC said.

Three of the nation’s largest consumer lenders — Bank of America Corp, JPMorgan Chase & Co and Wells Fargo & Co — together carried an average $403 billion of the loans on their books in the second quarter.

Failure to recognize credit losses “could delay appropriate loss mitigation activity, such as restructuring junior lien loans to more affordable payments or reducing principal on such loans to facilitate refinancings,” the FDIC said.

The regulator also said failure to properly consider “the current effect of more senior liens on the collectibility of an institution’s existing junior lien loans is an inappropriate application” of accounting principles.

According to the American Bankers Association, the rate of late payments on home equity loans was 3.52 percent in the first quarter, the highest since the trade group first began keeping data on consumer loan delinquencies in 1974. The late payment rate on home equity lines of credit was 1.89 percent.

Last month, Senate Banking Committee Chairman Christopher Dodd and House Financial Services Committee Chairman Barney Frank asked regulators to address whether lenders are inflating the value of home equity loans on their balance sheets, thereby discouraging efforts to restructure troubled loans.

Wells Fargo spokeswoman Julia Tunis Bernard declined to comment. Representatives of Bank of America and JPMorgan did not immediately return calls seeking comment.

No comments so far

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/