Huntington National Bank 2012 Annual Report Download - page 56

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We continue to identify situations where borrowers make a purposeful financial decision to stop making required payments on the
junior-lien loan, and in some cases, the first-lien loan. This strategic default scenario is generally associated with borrowers that have
very limited or no history of delinquency. These accounts also tend to migrate quickly from a current status to charge-off without
exhibiting the historical behaviors at each delinquency stage. The resulting increase in the relative speed of the migration from current
status to charge-off represents a negative impact to the longer term performance of the portfolio. Although the collateral value
assessment is an important component of the overall credit risk analysis, there are very few instances of available equity in junior-lien
default situations. Further, effective in 2012, any junior-lien loan associated with a nonaccruing first-lien loan is also placed on
nonaccrual status.
Within the home equity line-of-credit portfolio, the standard product is a 10-year interest-only draw period with a 20-year fully
amortizing term at the end of the draw period. Prior to 2007, the standard product was a 10-year draw period with a balloon payment,
while subsequent originations convert to a 20-year amortizing loan structure. After the 10-year revolving period, the borrower must
reapply to extend the existing structure or begin repaying the debt in a traditional term structure. The principal and interest payment
associated with the term structure will be higher than the interest-only payment, resulting in “maturity” risk. This maturity risk is
embedded in the portfolio which we address with proactive contact strategies beginning one year prior to maturity. In certain
circumstances, our Home Saver group is able to provide payment and structure relief to borrowers experiencing significant financial
hardship associated with the payment adjustment.
The table below summarizes our home equity line-of-credit portfolio by maturity date:
Table 13 - Maturity Schedule of Home Equity Line-of-Credit Portfolio
December 31, 2012
More than
(dollar amounts in millions) 1 Year or Less 1 to 2 years 2 to 3 years 3 to 4 years 4 years Total
Secured by first-lien $ 44 $59 $35 $ ---$ 2,193 $ 2,331
Secured by junior-lien 234 251 244 146 2,436 3,311
Total home equity line-of-credit $ 278 $310 $279 $146 $ 4,629 $ 5,642
Historically, less than 30% of our home equity lines-of-credit that are one year or less from maturity actually reach the maturity
date, and we anticipate this percentage will decline in future periods as our proactive approach to managing maturity risk continues to
evolve.
Residential Mortgages Portfolio
We focus on higher quality borrowers and underwrite all applications centrally. We do not originate residential mortgages that
allow negative amortization or allow the borrower multiple payment options. We will continue to evaluate the impact of the recently
issued Basel III NPRs on our residential mortgage origination policies.
All residential mortgages are originated based on a completed full appraisal during the credit underwriting process. We update
values on a regular basis in compliance with applicable regulations to facilitate our portfolio management, as well as our workout and
loss mitigation functions.
Generally, our practice is to sell a significant portion of our fixed-rate originations in the secondary market. As such, at
December 31, 2012, 50% of our total residential mortgage portfolio were ARMs. These ARMs primarily consist of a fixed-rate of
interest for the first 3 to 5 years, and then adjust annually. At December 31, 2012, ARM loans that were expected to have rates reset
through 2015 totaled $1.5 billion. These loans scheduled to reset are primarily associated with loans originated subsequent to 2007,
and as such, are not subject to the most significant declines in underlying property value. Given the quality of our borrowers, the
relatively low current interest rates, and the results of our continued analysis (including possible impacts of changes in interest rates),
we believe that we have a relatively limited exposure to ARM reset risk. Nonetheless, we have taken actions to mitigate our risk
exposure. We initiate borrower contact at least six months prior to the interest rate resetting, and have been successful in converting
many ARMs to fixed-rate loans through this process. Given the relatively low current interest rates, many fixed-rate products
currently offer a better interest rate to our ARM borrowers.