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FDIC Concerned About Home Equity Loan Growth

$416 billion 2nd quarter home equity production at banks, thrifts

August 30, 2004

By MortgageDaily.com staff

Home equity lending at commercial banks and savings institutions grew in the second quarter, but there is concern that the elevated rate of growth in this sector increases risks for lenders.

Banks and thrifts insured by the Federal Deposit Insurance Corp. (FDIC) produced $415.8 billion in home equity loans during the second quarter, which is up by $39.3 billion from the previous quarter, according to the FDIC's latest Quarterly Banking Profile. The total represents an annualized rate growth of about 41%.

The rapid growth in home equity borrowing contrasts the slowdown in cashout refinancing, which was down by more than half from a year ago, according to a prepared remarks statement by FDIC chief economist Richard Brown.

"Clearly, banks and thrifts are aggressively growing this area of their portfolios," Brown said. But, "they are doing so at a time when interest rates are rising, debt service ratios are at all-time highs, and home values in many areas have been rising faster than incomes and inflation."

Although home equity loan performance remains "very good" at the time, Brown warned that the "elevated rate of growth, combined with the introduction of new and more liberal loan structures, suggest that some homeowners and some lenders may be assuming higher levels of risk."

The economist added that analysts are presently studying home equity lending trends and that the FDIC expects to publish preliminary findings before the end of the year.

The report also showed that single and multifamily residential loan production among FDIC-insured institutions totaled over $1.7 trillion in the second quarter, which is about 4% above the first quarter.

Due to higher expenses at a few large banks, combined earnings for banks and savings institutions of $31.2 billion declined from the first quarter, FDIC said. However, the total was the second highest ever and was up from $30.1 billion in the second quarter 2003.

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