by Calculated Risk on 8/03/2009 04:44:00 PM

From Bloomberg: Banks Urged to Consider Higher Home-Equity Reserves (ht Brian)

U.S. banks may need to boost reserves for potential losses on home-equity loans under guidance issued by the Federal Deposit Insurance Corp. as property prices slump from their peak in 2006.

The regulator, in a letter today to banks and examiners, urged lenders to consider issues such as whether borrowers’ total housing debt exceeds the value of their properties and whether homeowners’ first mortgages have been reworked when determining allowances for losses on the debt.
...
“Failing 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, the FDIC said in the letter.
...
In its letter, the FDIC said “the failure to timely recognize estimated 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.”

From the FDIC: Allowances for Loan and Lease Losses in the Current Economic Environment: Loans Secured by Junior Liens on 1-4 Family Residential Properties

The need to consider all significant factors that affect the collectibility of loans is especially important for loans secured by junior liens on 1-4 family residential properties, both closed-end and open-end, in areas where there have been declines in the value of such properties. ...

[D]elaying the recognition of estimated credit losses on junior lien loans secured by 1-4 family residential properties by failing 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 GAAP. Additional supervisory action may also be warranted based on the magnitude of the deficiencies in this aspect of the institution's [allowance for loan and lease losses] ALLL process. Furthermore, the failure to timely recognize estimated 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. Examiners will continue to evaluate the effectiveness of an institution's loss mitigation strategies for loans as part of their assessment of the institution's overall financial condition.

The FDIC wouldn't release a letter unless they felt many banks were delaying the recognition of home-equity losses.