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HELOCs Coming Under New Regulatory Scrutiny

Bank examiners are exploring whether the nation's depositories have accurately valued $845 billion of home equity and second liens, according to seven people with direct knowledge of the matter, according to a report by Bloomberg.

The Federal Reserve and Comptroller of the Currency have teams checking on default risks at the biggest banks and whether these institutions have set aside enough reserves to cover the loans, according to sources.

Prior to the housing bust, some of the nation's largest banks made a market in HELOCs, holding some of these loans on their books but also securitizing them.

Until three years ago, HELOCs were part of 80-10-10 loan structures that were used by lenders to avoid having residential loan customers take out mortgage insurance policies.

Many 80-10-10 loans are now in default or are considered under water.

As part of their investigation, banking regulators are focusing on individual loans where borrowers are already overdue on their first mortgages, or where the value of the home has dropped below the size of the loans.

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