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Strategies to Increase Lendable Collateral Value

July 2013 - Whether you are seeking FHLBank Atlanta funding for liquidity or for asset/liability management purposes, the first step in the borrowing process is to ensure your institution has adequate borrowing capacity with the Bank. As your partner, FHLBank Atlanta is committed to helping your institution maximize the value of your pledged collateral within the parameters of its credit and collateral policies.

Changes to collateral policy and reporting over the last two years have created numerous opportunities for shareholders to obtain more value from their collateral. The following four strategies can help you capitalize on these opportunities as well as prepare for your next Collateral Verification Review.

Strategy 1: Maximize the value of commercial real estate (CRE) special purpose property portfolios

FHLBank Atlanta has greatly expanded the types of special purpose properties that receive value in a CRE portfolio. It is now possible to receive Lendable Collateral Value on a large portion of commercial real estate loans that were previously ineligible.

The following steps can help you identify loans to be added to the CRE Qualifying Collateral Report.

Step 1: Remove CRE loans secured by property types ineligible under Bank policy

Loans with potential environmental issues

Marinas, including slips, docks, and dry dock storage

Loans with noted or unresolved Phase 1 or Phase 2 issues (or similar environmental reports), except for certain properties described in Step 3

Vacant land or similar properties such as farms, mobile home parks, campgrounds, fish camps, RV parks, timberland, and parking lots (includes lots with a payment booth and attendant)

Sawmills

Incinerators

Radio and cell towers

Military property

Stand-alone restaurants not in the top 10 list (includes coffee shops, bakeries, etc.)

Mineral mines and quarries

Bars, nightclubs, casinos

Heavy industrial plants (petroleum plant, meat processing plant, power plant, public utility, steel mill, foundry, etc.)

Correctional facilities

 

Step 2: Identify CRE loans approved by the Bank to receive 100 percent of Lendable Collateral Value

Retail – Malls, power centers, grocery-anchored centers, fashion/specialty centers, outlets, strip centers, convenience stores without gas pumps, free-standing retail

Office – Office buildings, executive suites, medical office, government, banks

Hotel/Motel – Full- and limited-service hotel/motel

Industrial – Warehouse, distribution, R&D, flex and other light industrial

Top 10 stand-alone restaurants based on sales revenue or units operated

Places of worship with loan-to-value < 50%

Assisted living facilities, nursing homes, retirement homes

Community centers

Funeral homes

Daycare centers (pre-school onsite is permitted)

Veterinarians and animal hospitals (may include kennels, dog runs)

Mini or self-storage facilities

Step 3:  Identify performing special purpose property CRE loans that may be added to the Qualifying Collateral Report to receive 50 percent of Lendable Collateral Value 

Additional performing special purpose property CRE loans may be added to the Qualifying Collateral Report if they:

  • Are not on the list of ineligible property types in Step 1

  • Are not on the list of property types in the 100% Lendable Collateral Value category in Step 2

  • Meet all other eligibility requirements for CRE loans

  • Are reported on page 2 of the CRE Qualifying Collateral Report as “Special Purpose”

 

Strategy 2: Report Additional Data to Receive a Higher Market Value on a CRE Portfolio

FHLBank Atlanta has made it easier to obtain more Lendable Collateral Value by increasing the market value of CRE portfolios. By reporting one to three additional fields of data on the CRE Qualifying Collateral Report, you may see a significant increase in Lendable Collateral Value. Simply including loan-to-value data will, in most cases, increase market value. Including loan-to-value, remaining maturity, and debt service coverage ratio may increase market value even further.

 

Strategy 3: Achieve a 0.00% Exception Rate on a Collateral Verification Review

By following some simple preparation steps for your next Collateral Verification Review (CVR), your institution may achieve a significant reduction in its current extrapolation rate(s). This extrapolation rate reduction may occur on any reported loan pool and would increase the Lendable Collateral Value.

Avoiding exceptions typically found in CVRs is the best starting point to minimize the extrapolation rate. The following exceptions were the most common from the 2012 CVR process. The accompanying tips can help you avoid these exceptions. 

  1. Mortgage in inferior lien position – First liens only are allowed for 1-4 residential mortgages. First and second liens are allowed for CRE loans, multifamily loans, and home equity loans and lines of credit. Second lien CRE and multifamily loans require additional documentation.

  2. Ineligible property type– Exclude construction loans, ineligible special purpose properties, and land loans.

  3. Ineligible loan-to-value- For purchase money mortgages, use the lower of purchase price or appraised value, unless the loan seasoning exceeds 12 months and a more recent valuation has been obtained. Also, only report loans with eligible loan-to-value ratios.

  4. Missing flood certification or inadequate flood insurance– Flood insurance should be equal to the lesser of the unpaid principal balance, replacement cost, or $250,000 per structure ($500,000 for CRE loans). Each loan file must contain flood certification.

  5. Missing original note- Original notes should be properly executed and available for review.

  6. Manufactured home missing evidence of conversion to real property - Proof of conversion from personal property to real property is required.

 

Strategy 4: Incorporate Recent Collateral Changes into Your Reporting and Planning

Tax Assessments as Valuation Documentation - FHLBank Atlanta will consider tax assessments as valuation documentation for loans reported as collateral only when you rely on the tax assessment as a valuation source. If you use tax assessments for other reasons (verification of paid taxes, escrow calculation, etc.), the Bank will not use the tax assessment as a valid valuation document

Loan-to-Value – The Bank has expanded eligibility rules to include residential first mortgage loans with updated valuations indicating a loan-to-value ratio of up to 130% (loan-to-value at origination must have been no greater than 100%).

To learn more about these strategies and how you can implement them to increase your borrowing capacity, join us for a collateral workshop or webinar, or contact your Collateral Relationship Specialist. Contact information can be found on the Bank’s website.

© 2013 Federal Home Loan Bank of Atlanta, All Rights Reserved. 1475 Peachtree Street NE, Atlanta, GA 30309

The Federal Home Loan Bank of Atlanta is not a registered investment advisor. Nothing herein is an offer to sell or a solicitation of an offer to buy any securities or derivative products. You should consult your own legal, financial and accounting advisors before entering into any transaction.

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