Eye On Housing
According to the Household Debt and Credit Report released by the Federal Reserve Bank of New York (FRB NY), the outstanding amount of housing-related debt, both home mortgages and home equity lines of credit (HELOCs), totaled $8.8 trillion in the second quarter of 2016, 2.6% ($225 billion) greater than the level from one year ago.
However, the outstanding amount of home equity lines of credit declined by 4.2%, $21 billion, over the year to $478 billion. This is the 26th consecutive quarter of annual declines. Over this period, HELOCs have shrunk by 32.3%. In contrast, home mortgage debt rose over the year by 3.0%, $246 billion. The second quarter of 2016 marks the 11th consecutive quarter of annual growth. Over this period home mortgage debt has risen by 5.9%, but remains 10.0% below its pre-recession peak level.
The FRB NY’s measure of mortgage debt outstanding, which is comparable to home mortgage debt in the Flow of Funds, continues to rise. Additionally, a previous post documented the growth in multifamily residential debt outstanding. In sum, residential mortgage debt outstanding is growing.
On bank balance sheets, residential mortgage debt has different risk weights. The various risk weights were recently enacted by the Basel III regulations and they require banks to maintain a capital buffer to safely overcome downturns. The capital required is directly related to the level of risk a residential mortgage is presumed to present. The Basel III regulations went into effect on January 1, 2015 and banks were required to provide information through the Call Reports, on their residential mortgage exposures, 1-4 family and multifamily, beginning with the first quarter of 2015*.
Figure 1 above shows the total and distribution of residential mortgage exposure, both the amount held for sale and the amount of loans and leases, for banks with only domestic offices. According to the chart there was an adjusted total of $879 billion in residential mortgage exposure in the first quarter of 2015. The amount of residential mortgage exposure rose in the second quarter before dipping over the next two quarters. However, in the first quarter of 2016, the amount of residential mortgage exposure reached $906 billion.
In the first quarter of 2015, the majority of the residential mortgage exposure, 79%, had a 50% risk weight while 18% had a risk weight of 100% and 4% had a risk weight of 20%**. Over the past year for banks with domestic offices only, the share of residential mortgage exposure requiring a risk weight of 50% has widened at the expense of residential mortgages requiring either a 100% risk weight or a 20% risk weight.
Figure 2 presents the total amount and the distribution of residential mortgage exposure for banks with both domestic and foreign offices across the entire consolidated bank and not just at domestic offices. According to the graph above there was an adjusted total of $1.56 trillion in residential mortgage exposure in the first quarter of 2015. The amount of residential mortgage exposure climbed steadily over the next 3 quarters before a modest decline in the first quarter of 2016.
In the first quarter of 2015, the majority of the residential mortgage exposure, 65%, had a risk weight of 50%. However, the proportion of residential mortgages overall with a risk weight of 50% at banks with both domestic and international offices was less than the share at banks with only domestic offices. Conversely, a greater percentage of residential mortgage exposure had a risk weight of either 100% or 20%. Nevertheless, the trend has been the same, the portion of residential mortgages with a 50% risk weighting has grown through the first quarter of 2016, while those with a 20% or 100% risk weighting have shrunk.
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* According to the FDIC, residential mortgage exposures include the value of loans held for sale that meet the definition of a residential mortgage exposure or a statutory multifamily mortgage in the regulatory capital rules. This includes loans held for sale that are secured by first or subsequent liens on 1-4 family residential properties, except those qualifying as securitization exposures, as well as loans held for sale that are secured by first or subsequent liens on multifamily residential properties with an original and outstanding amount of $1 million or less, excluding those that qualify as securitization exposures. Excluded are loans held for sale that are secured by multifamily residential properties that do not meet the definition of residential mortgage exposure or statutory multifamily mortgage and are not securitized.
Residential mortgage exposures also include value of loans, net of unearned income that also meet the definition of a residential mortgage exposure or a statutory multifamily mortgage. These include loans secured by first or subsequent liens on 1-4 family residential properties, excluding those that qualify as securitization exposures, and loans secured by first or subsequent liens on multifamily residential properties with an original and outstanding amount of $1 million or less, also excluding those that qualify as securitization exposures. Excluded from this item are loans secured by multifamily residential properties that do not meet the definition of a residential mortgage exposure or a statutory multifamily mortgage and are not securitization exposures, and 1-4 family residential construction loans.
** 0% risk weight – the portion of any exposure that meets the definition of residential mortgage exposure or statutory multifamily mortgage and is secured by collateral or has a guarantee that qualifies for the zero percent risk weight. This would include loans collateralized by deposits at the reporting institution.
20% risk weight – the value of the guaranteed portion of FHA and VA mortgage loans and the portion of any loan which meets the definition of residential mortgage exposure or statutory multifamily mortgage and is secured by collateral or has a guarantee that qualifies for the 20 percent risk weight. This includes loans covered by an FDIC loss-sharing agreement.
50% risk weight – the value of loans secured by 1-4 family residential properties (only include qualifying first mortgage loans); qualifying loans that meet the definition of a residential mortgage exposure and qualify for 50 percent risk weight. The loans must be prudently underwritten, be fully secured by first liens on 1-4 family or multifamily residential properties, not 90 days or more past due or in nonaccrual status, and have not been restructured or modified unless modified or restructured solely pursuant to the U.S. Treasury’s Home Affordable Mortgage Program (HAMP). Also includes loans that meet the definition of statutory multifamily mortgage loans which meet the definition of residential mortgage exposure that is secured by collateral or has a guarantee that qualifies for the 50 percent.
100% risk weight – The value of loans related to residential mortgage exposures that are not included in the previous buckets. These include loans that are junior lien residential mortgage exposures if the bank does not hold the first lien on the property, except if the portion of any junior lien residential mortgage exposure that is secured by collateral or has a guarantee that qualifies for the zero percent, 20 percent, or 50 percent risk weight. Also includes loans that are residential mortgage exposures that have been restructured or modified, except those loans restructured or modified solely pursuant to the U.S. Treasury’s HAMP, and the portion of any restructured or modified residential mortgage exposure that is secured by collateral or has a guarantee that qualifies for the zero percent, 20 percent, or 50 percent risk weight.
Other Risk-Weighting Approaches – The portion of any loan that meets the definition of residential mortgage exposure or statutory multifamily mortgage and is secured by qualifying financial collateral that meets the definition of a securitization exposure.
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