As financial firms sift through senior liens to assess the underlying credit quality, federal regulators are reminding banks to also study junior liens linked to their portfolios.

The Federal Reserve, the Federal Deposit Insurance Corp., the National Credit Union Administration and the Office of the Comptroller of the Currency released guidance on the issue of assessing risks on junior liens on one-to-four family residential properties Tuesday.

“Amidst continued uncertainty in the economy and the housing market, federally regulated financial institutions are reminded to monitor all credit quality indicators relevant to credit portfolios, including junior liens,” the federal regulators wrote.

Junior liens include equity lines of credit and second mortgages. Banks are advised to ensure all information is reported on probable losses within junior-lien portfolios. The data also should include the delinquency status of senior liens linked to junior liens, the regulators said.

If the bank does not own or service an associated junior lien, banks should use credit reports or other data from third-party service providers to detect risk.

Identifying risk should involve studying delinquencies on junior liens, credit scores, loan documentation, origination vintage, geographic location of the home, home equity lines of credit and the minimum payments due, and conditions on HELOCs that could suggest a borrower is subject to payment shocks, the agencies said.

In addition, banks should make sure their default risk assessment plan looks at the potential of payment shocks on adjustable-rate junior liens or HELOCs that are moving from interest-only to amortizing loans, according to the guidance.

Write to Kerri Panchuk.

3d rendering of a row of luxury townhouses along a street

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