**Office of the Comptroller of the Currency**

**Board of Governors of the Federal Reserve System**

**Federal Deposit Insurance Corporation**

**Office of Thrift Supervision**

**Interpretive Letter #1058**

**May 2006**

**12 CFR Part 3**

April 20, 2005

Suzanne C. Hutchinson

Executive Vice President

Mortgage Insurance Companies of America

1425 K. St., NW

Washington, D.C. 20005

Dear Ms. Hutchinson,

Thank you for your recent letters regarding the agencies' risk-based
capital rules and supervisory processes governing structured second
mortgages. The agencies are aware of your views and concerns with
respect to the elevated credit risk related to high loan-to-value (LTV)
financing. The agencies have issued interagency guidance[^1] that
indicates an institution will come under supervisory scrutiny as the
total of all loans in excess of the supervisory LTV limits, including
high LTV residential real estate loan exceptions, approach 100 percent
of total capital.

The agencies regularly review our existing examination policies,
procedures, and capital standards and make revisions when warranted.
Regarding the capital treatment associated with second liens, the
agencies provided you with an interpretative letter dated March 17,
2003. The agencies are still of the view that second mortgages would not
meet the definition of a recourse arrangement even when the first and
second mortgages were made to the same borrower simultaneously. The
agencies view the second mortgage as a separate transaction that does
not -- in and of itself -- serve as a credit enhancement.

As you may know, the agencies are considering modifications to update
our existing risk-based capital standards to ensure our capital rules
remain broadly representative of risks present in the banking system.
The agencies intend to consider the existing capital requirements on
residential mortgages in connection with this effort. Also, to reiterate
a point made in Acting Comptroller Julie Williams' January 28, 2005
letter addressed to you, the agencies are in process of developing
guidance to reinforce and clarify our expectations regarding risk
management practices for home equity lending. We expect banks to have
appropriate risk management controls in place to manage the growth and
changing product terms, structure, and underwriting in home equity
lending, including use of high LTV home equity credits extended as part
of structured mortgage transactions.

Should you have additional questions, please contact Tom Boemio, Senior
Project Manager, Policy, Federal Reserve Board (202-452-2982), Nancy
Hunt, Risk Expert, OCC, (202-874-5211), Jason Cave, Chief, Capital
Markets Policy, FDIC (202-898-3548), or David W. Riley, Senior Analyst
(Capital Policy), OTS (202-906-6669).

Sincerely,

/s/ /s/

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\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Barbara Bouchard William A. Stark

Deputy Associate Director Associate Director

Federal Reserve Board Federal Deposit Insurance Corporation

/s/ /s/

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\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Tommy Snow Michael D. Solomon

Director, Capital Policy Director, Capital Policy

Comptroller of the Currency Office of Thrift Supervision

[^1]: Interagency Guidance on High LTV Residential Real Estate Lending,
    October 8, 1999.