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Loan Risk to Continue Increasing

OCC issues 2010 report

Sept. 2, 2010

By staff

An annual bank report on underwriting standards found that even though banks have reined in mortgage lending policies, risk continues to rise. The report included findings on residential loans, home-equity loans and commercial mortgages. The share of banks that continue to tighten guidelines, however, is falling.

Risk on retail and commercial loans increased for the third consecutive year despite tightened underwriting standards, according to the 16th annual Survey of Credit Underwriting Practices released Thursday from the Office of the Comptroller of the Currency. But competition is driving some easing of standards, and credit market liquidity has shown a slight improvement.

The survey of 51 of the biggest national banks reflected responses based on the 12 months ended March 31. Around $4 trillion in loans, accounting for 93 percent of loans in the banking system, were analyzed.

The survey found that the majority of banks are using the same underwriting standards whether they intend to hold or distribute the loans.

Examiners expect portfolio risk to continue increasing over the next year.

"We are beginning to see some recent signs that standards may be loosening," according to OCC Deputy Comptroller for Credit and Market Risk Dave Wilson -- though he also warned that "credit performance remains a concern despite several years of tightening."

On residential mortgages, 59 percent of the 42 banks that make home loans indicated that their residential underwriting standards had tightened -- a smaller share than the nearly three-quarters who indicated such in the 2009 survey.

Just 5 percent indicated they had eased home-loan standards, though that was an improvement from none last year. No changes to guidelines were made by 36 percent.

At the same time, more than two-thirds of the institutions indicated that residential risk had "increased somewhat," a bigger share than the 57 percent who felt that way last year. But none of this year's respondents thought risk had "increased significantly" -- a big improvement from 26 percent last year. More than a quarter of the 2010 crowd said no changes had occurred, accounting for more than the prior year's 14 percent.

On home-equity and high loan-to-value loans, 87 percent of the eight respondents that make such loans said they had tightened guidelines, down from 93 percent last year. The rest of this year's subjects said no changes were made.

HEL and high-LTV risk increased "somewhat" at nearly two-thirds of the respondents, compared to half last year, and was "significantly" worse at 12 percent -- improving from 37 percent in 2009.

In the commercial mortgage sector, 72 percent of the banks noted tightened guidelines for commercial construction, 64 percent of residential construction lenders tightened guidelines and 60 percent of other commercial mortgage lenders were more restrictive. Still -- the share for all three categories was lower than a year ago.

On commercial construction loans, credit risk was considered "significantly" higher by 11 percent of respondents, tumbling from 42 percent last year. But 64 percent reported that risk "increased somewhat," worse than half in 2009.

Just 4 percent of residential construction lenders reported a "significant" increase in risk, a fraction of the 41 percent last year. Half said risk increased somewhat, worse than 41 percent. But nearly a third said risk "declined somewhat" -- compared to none last year.

Most -- 81 percent -- of the other commercial mortgage lenders said risk was somewhat higher, rising from 55 percent. The share that said risk had significantly increased dropped to 4 percent from more than a third.

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