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.
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.
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.
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.