Huntington National Bank 2007 Annual Report Download - page 42

have variable rates of interest and do not require payment of principal during the 10-year revolving period of the line. During
2007, we originated commitments of $1.5 billion of home equity lines with a weighted average combined LTV ratio at origination
of 76% and a weighted average FICO score at origination of 748. The weighted average combined LTV ratio at origination of our
home equity portfolio was 75% at December 31, 2007.
During 2007, we actively continued to address the risk profile of this portfolio. We eliminated sourcing new production through
brokers, choosing instead to focus production on our own banking network. This action was a continuation of our strategy begun
in 2005 to reduce the reliance on brokers, as this channel typically included a higher-risk borrower profile, as well as all of the risks
associated with a third party sourcing arrangement. Regarding origination policies, we tightened underwriting standards for
borrowers with lower FICO scores and borrowers with higher debt-to-income ratios, and we capped the cumulative LTV for non-
owner occupied houses and for second homes at 80%. We also significantly strengthened the process for appraisals, income, and
cash flow assessments. While it is still too early to make any declarative statements regarding the impact of these actions, our more
recent originations have shown lower levels of cumulative risk during the first 12 months of the loan or line term compared with
earlier originations.
Residential Mortgages
At December 31, 2007, we had $5.4 billion of residential real estate loans, which represented 14% of total loans and leases. We
focus on higher quality borrowers, and underwrite all applications centrally, or through the use of an automated underwriting
system. We do not originate residential mortgage loans that (a) allow negative amortization, (b) have a LTV ratio at origination
greater than 100%, or (c) are “option adjustable-rate mortgages (ARMs).” At December 31, 2007, the loans in the portfolio were to
borrowers with an average current FICO score of 709 and had an average LTV ratio of 76%.
A majority of the loans in our loan portfolio have adjustable rates. Our ARMs are primarily mortgages that have a fixed rate for
the first 3 to 5 years and then adjust annually. These loans comprised 61% of our total residential mortgage loan portfolio at
December 31, 2007. At December 31, 2007, ARM loans that were expected to have rates reset totaled $814 million and $661 million
in 2008 and 2009, respectively. As over 80% of our ARM borrowers have current FICO scores over 670, and current experience
shows that borrowers with FICO scores over 670 are able to effectively pursue refinance options, 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 6 months prior to the interest rate resetting, and have been successful in converting many ARMs to fixed
rate loans through this process. Additionally, where borrowers are experiencing payment difficulties, loans may be modified based
on the borrower’s ability to repay the loan.
We had $0.5 billion of Alt-A mortgages in the residential mortgage loan portfolio at December 31, 2007. We define Alt-A
mortgages as having one or more of the following characteristics: (1) stated income, (2) lower FICO, and (3) high LTV. While our
underwriting standards for this product have permitted extending credit to these borrowers with these characteristics, we have not
layered all three of the characteristics to any one borrower. Our exposure relating to the Alt-A product will decline in the future as
our originations of this product have declined significantly over the past several years due to stricter credit guidelines, with the
ultimate elimination of the product in late 2007. For 2007, originated Alt-A loans totaled $34 million, or only 3%, of the
$1.0 billion of total residential mortgage loans originated. This was down significantly from 14% of 2006 residential mortgage loan
originations.
Interest-only loans comprised $0.9 billion, or 16%, of residential real estate loans at December 31, 2007. Interest-only loans are
underwritten to specific standards including minimum FICO credit scores, stressed debt-to-income ratios, and extensive collateral
evaluation. At December 31, 2007, borrowers for interest-only loans had an average current FICO score of 729 and the loans had
an average LTV ratio of 79%. We continue to believe that we have mitigated the risk of such loans by matching this product with
borrowers appropriately.
CREDIT QUALITY
In addition to the negative impact from the previously discussed Franklin restructuring concerning credit quality performance
measures for 2007, there was also deterioration in non-Franklin-related loans. This reflected the negative impact of the economic
weakness in our Midwest markets, most notably among our borrowers in eastern Michigan and northern Ohio, and within the
residential real estate development portfolio. Consumer loans also saw negative trends impacted by the softening economy, but less
so than commercial loans.
These factors, in addition to the Sky Financial acquisition, resulted in significant increases to virtually all credit quality measures
on an absolute basis: including the level of net charge-offs, NALs, NPAs, and the ACL. We believe the more meaningful way to
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MANAGEMENT’S DISCUSSION AND ANALYSIS HUNTINGTON BANCSHARES INCORPORATED