On Friday, June 26, 2009, the federal banking agencies released an Interim Final Rule clarifying that a banking organization may retain the risk weight assigned to a mortgage loan prior to the modification of the loan under the Making Home Affordable Program (MHA Program). The MHA Program, announced by the Treasury Department in March, implements the Homeowner Affordability and Stability Plan and encourages sustainable loan modifications for homeowners at risk of foreclosure.
Under the OCC and Federal Reserve's existing risk-based capital rules, mortgage loans that were previously entitled to a 50% risk weighting must be accorded a 100% risk weighting if the loan is “restructured” (in the case of the OCC) or is not “performing in accordance with their original terms” (in the case of the Federal Reserve). Under FDIC and OTS rules, banks may assign a 50% risk weight to any modified mortgage loan, so long as the loan, as modified, is not 90 days or more past due or in nonaccrual status and meets other applicable criteria for a 50% risk weight. The purpose of these amendments is to provide that mortgage loans modified under the MHA Program will retain the pre-modification risk weighting, so long as other "applicable prudential criteria" are satisfied.
In part, under the Interim Final Rule:
- Mortgage loans that are risk weighted at 50% prior to modification under MHA will remain risk weighted at 50% post modification, provided the borrower meets certain underwriting criteria.
- Mortgage loans risk weighted at 100% will retain a 100% risk weighting after modification.
- If a mortgage loan were to become 90 days or more past due or carried in non-accrual status or otherwise restructured after being modified, the loan would be assigned a risk weight of 100%.
- Past due and nonaccrual loans that receive a 100% risk weight would return to a 50% risk weight under certain circumstances.
- Under certain circumstances, banking organizations can “look through” an exposure to the risk weight of a residential mortgage loan underlying that exposure.
The FDIC issued a Financial Institution Letter (FIL-36-2009) summarizing the salient provisions of the Interim Rule. The agencies are seeking public comment within 30 days of publication of the interim final rule in the Federal Register.