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Almost ten years ago, at the peak of the mortgages bubble, banks began to speed up the emergence of hurricanes. Indeed, 58 per cent of all currently pending HOELOCs were from the years 2004 to 2007. Usually the following possibilities are offered by HELOCs: a ten-year drawdown during which the debtor has recourse to a credit line with recourse to a repo facility and only makes interest-bearing repayments; and (2) a redemption maturity during which the debtor will no longer be able to avail itself of the facility and the capital will mature, either as a ballon or as a higher amount of money each month over the residual life of the facility.
With the end of the ten-year drawing phase approaching for the vast majority by 2014-2017, the agencies are worried that borrower will face problems: 1 ) increasing interest levels because most of HELOC' s are floating and interest levels have been very low; 2 ) cash shocks because HELOC' s will move from pure interest to full amortisation; and 3 ) funding problems because security levels have fallen significantly since the emergence of such HELOC'.
In order to help banks tackle these problems in an efficient way, the agencies have published the guidance. In line with the guidance, as the HELOC drawing deadlines approach, banks should clearly and clearly interact with the borrower and carefully and disciplinedly administer them. In particular, the guidance contains five riskmanagement guidelines which should be included in the end-of-draw riskmanagement programmes of banks and which are subject to review by the auditors as part of the supervision work.
There are five principles: appropriate segments and end of draws exposures analyses in credit and leasing loss estimates (ALLL). They also describe certain riskmanagement requirements that a diligent bank should incorporate into its policy and practices for dealing with terminal hurdles to credit that are commensurate with the scale and sophistication of the bank's credit portfolios.
Those expectation shall include: assuring that controls offer an appropriate level and cover of all exposures at the end of the drawing season. Lastly, the Guidance differentiates between what is required of a bank with a significant HELOC portfolio and higher-risk features (i.e. extensive portfolio monitoring and valuation schemes and procedures) and what is required of a cooperative bank/credit cooperative with smaller HELOC portfolio and lower-risk features (i.e. they can use less demanding process).
This guidance is another example of the regulatory authorities' refocusing on mortgages, as forecast early this year when the Office of the Comptroller of the Currency released a major upgrade of the Mortgages Business in Comptroller' s Handbook. Credit Institutions should make sure that they include the five HELOC end-of-draw risks policy approaches set out above in the implementation of their strategies and processes, in particular taking into consideration the fact that regulatory authorities will take these approaches into consideration in prudential reviews.