Banks to Hike Reserves to Curb Effects of Repossessed Homes
Banks have been advised by the Federal Deposit Insurance Corporation to increase their reserves for losses on home-equity loans as repossessed homes continue to drive down home prices from their peak prices in 2006.
FDIC asked banks to consider the negative equity of borrowers and loan modifications when determining their reserve levels for home equity loans.
Last month, House Financial Services Committee Chairman Barney Frank and Senate Banking Committee Chairman Christopher Dodd asked federal regulators to check whether banks have been inflating their home-equity loans to hinder loan modification efforts that could stem the continued increase in foreclosures across the country.
FDIC stated in its letter to the banking industry that they need to consider the effect of senior liens on the ability of collecting junior lien loans in their determination of reserve levels. It reiterated that the failure to consider the liens properly violates accounting principles.
Fortress Investment Group and other mortgage bond investors have complained that banks are not reducing the loan balances of troubled borrowers because other types of loan modifications do not require them to post losses on their home-equity loans.
The FDIC reiterated that delaying the recognition of loan losses, such as reduction of principal balances and reduction of monthly loan payments in junior lien loan restructurings and refinancing, can weaken loss mitigation efforts.
On the last day of June, Bank of America allocated 5.59 percent of its portfolio of $155 billion as reserves for possible home-equity losses, based on financial statements on its web site. Its nonperforming loans comprise 2.56 percent of its portfolio while delinquent loans not yet counted as nonperforming comprised 1.29 percent.
Half of BofA’s portfolio comprised loans that have surpassed 90 percent of property values, with 41 percent of these located in Florida and California, which are among the states with the highest number of foreclosure homes in the U.S.
At the end of June, Wells Fargo said that 2.65 percent of its $117.5 billion home-equity loan portfolio had been delinquent by at least two months, an increase of 2.53 percent from the previous quarter.
The bank said its annualized loan loss rate increased from 2.09 percent in the previous quarter to 3.25 percent and that 37 percent of its loan portfolio are for home loans made in Florida and California. Currently, it is liquidating another $9.35 billion in home equity loans.
Lajuan Williams-Dickerson, spokesperson for FDIC, admitted that setting allowances for loan losses is an imprecise activity and requires management judgment.
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