Subprime ARMs Waning

In the second quarter, the rate of residential loans past due 30 days or more or in nonaccrual status to total home loans was 1.15%, down 7 basis points from the first quarter and 2 BPS from the comparable period a year earlier, the Federal Deposit Insurance Corp. said its latest quarterly series of State Profiles reports showed.

Although net interest margins remain tight for many FDIC-insured institutions, bank and thrift earnings through the second quarter continued to be supported by low credit losses across most loan categories and most posted strong financial performance in virtually every region, the regulator announced.

Despite strong overall performance, analysts in the San Francisco and New York regions noted some deterioration in the performance of subprime adjustable-rate mortgages compared to fixed-rate loans — a trend that may reflect “payment shock” for some ARM borrowers, the FDIC said.

The regulator cited previous data that showed subprime ARM delinquencies rose to 8.2 percent in the second quarter from 5.8 percent a year earlier, compared to prime ARMs’ rate, which edged up to 1.8 percent.

Meanwhile, notices of default filed against California borrowers surged 67 percent relative to year-ago second quarter levels, a rate of increase accelerated from prior quarters that “appears to reflect rising default activity among subprime borrowers in particular.” In the San Francisco Bay area, the year-over-year increase in percentage of notices of default was 37.5%, FDIC added.

“While still-strong rates of home price appreciation helped keep residential mortgage delinquencies in check through second quarter 2006, an expected slowdown in home price growth going forward could translate into more credit problems for mortgage borrowers” in California, the report said.

In New York, previous research shows the foreclosure rate on subprime ARMs is increasing — from a low of 1.16 percent in second quarter 2004 to 2.11 percent in second quarter 2006, which is above the national average of 1.87 percent although considerably lower than the state’s previous high of 6.03 percent in 1999, FDIC said.

Throughout the nine census regions, delinquency was highest in the East South Central at 1.83%, but this area also had the largest quarterly decrease — 23 basis points, according to the report.

The East North Central reportedly followed with a delinquency rate of 1.80 percent, which edged down from the first quarter but was 11 basis pint above a year earlier.

The West South Central followed with a 1.44% delinquency rate and fourth was the West North Central, which had a 1.25% rate and was the only the only other region with a higher rate than the comparable period a year ago, due to an uptick of 3 BPS, the report said.

The South Atlantic had the fifth highest delinquency rate, at 0.86% in the second quarter, followed by the Mid-Atlantic, New England, Mountain and Pacific regions, FDIC added.