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A Closer Look at Collateral Opportunities

March 2012 - As a cooperative, FHLBank Atlanta  continuously looks for ways to provide greater value to our shareholders and  serve their business needs more effectively. We deliver value by offering  innovative, flexible funding solutions that help shareholders extend credit and  invest in their communities. We also seek to create policies and procedures  that make it easier for shareholders to do business with the Bank and have  access to the funding they need, when they need it.

As part of our efforts to enhance  value, we recently announced several initiatives that will expand collateral  opportunities for shareholders and help them manage their borrowing capacity  with the Bank more effectively. These initiatives span the full spectrum of  collateral that is available for shareholders to pledge. For example, FHLBank  Atlanta now accepts residential 1-4 mortgages with up to 130 percent current loan-to-value  (if the loans had 100 percent or less loan-to-value ratio when initially   pledged), and has broadened its securities eligibility to include fixed-rate  Ginnie Mae Home Equity Conversion Mortgage Securities. The most significant  changes, however, have been the expansion of commercial property eligibility  and an upcoming transition to market-based valuation of commercial real estate  loans and multifamily mortgages.

Expansion of Commercial Property Eligibility

Historically, FHLBank Atlanta has  provided limited eligibility for commercial real estate, allowing shareholders  to pledge loans for traditional property types, such as retail, office, top  restaurant chains, and other similar properties, and providing lendable  collateral value equal to 50 percent of the unpaid principal balance.  Understanding that shareholders have broad and diverse commercial portfolios,  the Bank began exploring opportunities and risks associated with increasing the  pool of eligible commercial properties. In late 2011, the Bank announced a  significant expansion of eligibility for commercial real estate loans.

With this change, the Bank  established two categories of eligible commercial real estate loans and created  a third category of property types that would continue to be excluded.  Commercial properties traditionally accepted as eligible will continue to  receive 50 percent lendable collateral value with the addition of loans collateralized  by funeral homes, community centers, and retirement homes. Most notably, the  Bank created a new category of eligible commercial properties and now provides 25  percent value for any other performing commercial real estate loan that does  not fall into the 50 percent category and is not collateralized by an excluded  property. Examples of these newly eligible properties include cold storage  facilities, libraries, hospitals and treatment centers, car wash facilities,  and many more.

The Bank requires minimal  additional reporting to receive value on these loans, with shareholders only  having to provide the total percentage of special purpose property loans  included in their commercial real estate portfolio on the Qualifying Collateral  Report. Loans are reviewed for eligibility during the Collateral Verification  Review process.

Market-based Valuation

In 2010, the Bank began a  transition of its methodology for determining the lendable collateral value of  loans pledged by shareholders from a static calculation based on unpaid  principal balance to a dynamic market-based valuation. This transition began  with residential 1-4 loans in 2010 and continued with home equity loans and  lines of credit. Beginning in the second quarter of 2012, the Bank will  complete this transition and begin calculating lendable collateral value of  commercial real estate loans and multifamily mortgages based on market values. Given  current market conditions, we expect this new valuation methodology to benefit  many shareholders that pledge commercial and multifamily portfolios.

Under the new market valuation model,  shareholders will have the option, but are not required, to provide minimal  additional data on their commercial real estate and multifamily portfolios. Reporting  the additional data for commercial and multifamily will create the potential  for higher values.

To create the model, the Bank analyzed  and valued approximately 2,000 loans reviewed during the 2011 Collateral  Verification Review program. Through this analysis the Bank identified three  variables, in addition to unpaid principal balance, that can provide an accurate  estimate of values: current loan-to-value, debt service coverage ratio, and  remaining maturity.

Shareholders can report only unpaid  principal balance as they do today, unpaid principal balance with current loan-to-value, or all four data points. While shareholders can continue providing  only unpaid principal balance, there is a strategic opportunity in taking the  steps to gather and report the additional data. With more information, there is  greater potential for a higher value on the loans, which can result in  increased borrowing capacity for the shareholder.

Example:

To see how this opportunity can  work in practice, let’s look at an example of a commercial real estate  portfolio.

Community Bank A pledges a $600  million commercial real estate portfolio. The institution has an FHLBank  Atlanta credit rating of eight. Under the current valuation method, the  portfolio would receive the following value, assuming all loans are eligible  and before the extrapolation rate is applied.

$600 million unpaid principal balance x 50% commercial real estate discount = $300 million Lendable Collateral Value                                        

Under the market-based valuation  model, the shareholder can receive different lendable collateral values depending  on the amount of data reported. There are three possible levels of data  reporting. Figure 1 shows the  potential lendable collateral value of a commercial portfolio with unpaid  principal balance of $600 million for all levels of reporting and compared to the  current valuation model. As this example shows, shareholders have the potential  for higher lendable collateral value of the commercial portfolio with every  level of reporting when compared to current practices. While the base level of  reporting provides a marginal increase in the value, providing all four data  points can result in significant increase in lendable collateral value.

In this example, the difference between level one reporting and level three reporting  is more than $70 million of value.

Lendable Collateral Value - Current vs. Proposed

Figure 1: Average Lendable Collateral  Value – Discounted UPB vs. Market-based Valuation

Data for Each Reporting Level:

Level One:  Unpaid principal balance only

Level Two:  Unpaid principal balance and current loan-to-value

Level  Three: Unpaid principal balance, current loan-to-value, debt service  coverage ratio, and remaining maturity

Increase Your Borrowing Capacity with FHLBank Atlanta

Shareholders  can take advantage of these new collateral opportunities by reporting  additional data on commercial real estate and multifamily loan portfolios on  their Qualifying Collateral Reports. To learn more, listen to a recording of  our recent collateral  webinar, call your Collateral Relationship Specialist, or call the Funding Desk  at 1-800-536-9650, extension 8011.

© 2012 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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