Banking regulators missed a major loophole in proposed capital rules

Proposed updates to U.S. bank capital rules (often called Basel III Endgame) contain a significant oversight regarding how home equity is calculated. Currently, the rules look at the risk of a primary mortgage but fail to account for the added risk when a homeowner takes out a second mortgage or a Home Equity Line of Credit (HELOC). If regulators close this loophole, it will become much more 'expensive' for banks to hold these loans on their books. For retailers in the home improvement and remodeling space, this is a signal that the easy era of home equity financing might be tightening. Banks are being asked to set aside more capital for loans where the total combined loan-to-value ratio is high. If a homeowner has a first mortgage and then adds a second loan for a kitchen remodel or new roof, the new rules might categorize that borrower as much higher risk. This could lead to banks raising interest rates on home equity products or tightening their credit standards. For contractors and home improvement dealers, this means you should start diversifying your financing options. Don't rely solely on customers using their own bank's equity lines. Having a dedicated point-of-sale (POS) financing partner or a non-bank lender will be crucial if traditional second mortgages become harder for your customers to secure.

Source: American Banker — Top News

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