Alarmed by recent examiners' reports of increasing credit risk in high loan-to-value home equity portfolios, the four bank and thrift regulatory agencies clarified existing guidance on the subject Tuesday.

"This guidance is really just intended to get it out on the table; these loans are riskier than typical home equity loans, and bankers need to recognize that," said David Gibbons, deputy comptroller at the Office of the Comptroller of the Currency.

The interagency statement reminded bankers that, though high loan-to-value lending can be profitable, it requires careful risk-return analysis. The statement defined high loan-to-value home equity loans as those in which the credit granted equals or exceeds 90% of the value of the borrower's property combined with any insurance or other collateral.

The statement outlines four "primary credit risks" such loans carry: increased risk of default and loss, inadequate collateral, long maturities, and limited remedies in the event of default.

Currently, the value of a bank's high loan-to-value products may not exceed 100% of its capital. As a bank's ratio approaches 100%, the agencies said, it can expect "increased supervisory scrutiny." Banks exceeding the threshold may be required to sell some loans or raise capital.

When computing a credit's loan-to-value ratio, bankers must include not only the one they are contemplating but also all loans secured by the residence.

All exceptions to internal high loan-to-value policies must be identified in an institution's records, the agencies said.

-- Rob Garver

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