WASHINGTON — The Federal Deposit Insurance Corp. reiterated Monday that banks should look closely at potential losses on second mortgages and other kinds of home equity loans that could come under increased pressure as the foreclosure crisis continues.
In a financial institutions letter, the agency updated three-year-old guidance on accounting for losses on junior liens. It emphasized the need to consider not only historical performance factors but also current economic conditions, such as foreclosures and unemployment rates, when forecasting loan losses.
Observers said the move was designed to get banks to write down losses on junior liens faster, possibly to ease refinancing and loan modifications under the Obama administration's foreclosure prevention plan.
"I think the intent of this is to get the banks to start writing down these loans more quickly and more significantly so they're not the impediment they have been to refinancing and modification," said Mark Zandi, the chief economist and co-founder of Moody's Economy.com, Inc.
Monday's guidance could change that. "I think that's the broader intent of the FDIC," he said.
Steve Fritts, the FDIC's associate director of supervision and consumer protection, said that encouraging refinancings was "definitely part of it."
"I think certainly our goal is to try to get the mortgages, whether they're first or seconds, lined up with the economic reality, and to the extent that we can keep homeowners in their homes, that is going to be the best outcome for the lender," he said.
The Obama administration's refinancing and loan modification plans have been hamstrung, in part, by the reluctance of lenders and servicers to take losses on primary mortgages without also seeing writedowns on any other outstanding loans against a house. Junior lien holders, meanwhile, have resisted writing down loan losses, and the two sides have become gridlocked.
"The first-lien holders are reluctant to modify given that the second-lien holders are still there and will benefit from any modifications," said Zandi.
Fritts said the guidance was not an admonition to banks for any present failure to properly account for second-lien losses; rather, he said, it was meant to be forward-looking.
"What we're really focusing on is not that there is a problem but [to] make sure that one doesn't develop," he said.
But Ann Grochala, the vice president for lending and accounting policy at the Independent Community Bankers of America, said bankers should definitely expect more scrutiny on the issue from examiners.
"It appears that, clearly, the banking regulators see that some banks aren't looking at these closely enough that they felt the need to remind the banks of this guidance," she said.
