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Subject: Mortgage Banking
Date: February 25, 2003
To: Chief Executive Officers of All National Banks, Department and Division Heads, and All Examining Personnel
Description: Interagency Advisory on Mortgage Banking
The attached "Interagency Advisory on Mortgage Banking" was issued jointly by the Comptroller of the Currency, The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision on February 24, 2003.
The purpose of this advisory is to highlight concerns and provide guidance regarding mortgage-banking activities, primarily in the valuation and hedging of mortgage-servicing assets. While the number of banks with significant exposure to mortgage-banking assets is limited, mortgage banking is a significant and growing business line for many institutions. Mortgage production volume increased significantly over the past two years, as mortgage rates fell to record lows and refinancing activity reached an all time high. Many borrowers have been attracted to new lending products by innovative, low-cost lending programs, widespread use of automated underwriting, and increased competition among banks, thrifts, and other financial institutions. This high volume of mortgage activity exposes banks to a number of risks. These risks are discussed in the attached statement.
When properly managed, mortgage-banking activities can contribute to the strength of any financial institution. Institutions with significant exposures to mortgage assets should expect greater scrutiny of their mortgage activities during examinations. The OCC may also require additional capital for banks that fail to exercise the sound practices set forth in this advisory in their risk management programs.
For further guidance on mortgage banking issues contact Thomas Rees, Office of the Chief Accountant at (202) 874-5411, Greg Ramsey, Office of the Chief Accountant at (202) 927-4582, or Greg Coleman, Treasury and Market Risk at (202) 874-2777.
Kathryn E. Dick
Zane D. Blackburn