Banks Increase Portfolio Mortgage Holdings

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2 · 01 · 11

As banks improve their outlook for delinquency, some have increased their investments in residential loans that don’t qualify for government or agency programs.

That was according to the January 2011 Senior Loan Officer Opinion Survey on Bank Lending Practices released Monday by the Federal Reserve Board. A total of 57 domestic banks and 22 U.S. branches of foreign banks participated in the survey.

The report addressed supply and demand changes for bank loans to businesses and households over the past three months.

Some of the respondents said they had tightened standards on nontraditional home loans. It was the second consecutive time that nontraditional mortgage standards had been tightened.

But overall, bankers said that there was little change in their standards on prime residential mortgage loans and home-equity lines-of-credit — or HELOCs.

Demand for all types of residential loans was weaker. On closed-end loans, it was the second time in a row demand fell.

Residential closed-end loans owned by banks increased over the second half of last year based on the Fed’s weekly H.8 statistical release, and 45 percent of the respondents in the survey noted that their residential loan portfolios had increased.

So the survey addressed this growth.

“The majority of banks that recorded such an increase noted the relative attractiveness of the risk-adjusted returns on these loans compared with other assets and reported having become more willing to expand their overall balance sheets via this category of loan,” the report stated.

In addition, around one-third of the respondents indicated that they had originated more loans that did not qualify for endorsement by the Federal Housing Administration and were ineligible for sale to Fannie Mae or Freddie Mac.

“Banks were somewhat less likely to credit their accumulations of closed-end residential mortgages to reductions in charge-offs or paydowns, or to originations of GSE-eligible loans that had exceeded their banks’ capacity to process such loans for sale to the GSEs,” according to the Fed. “Only two banks attributed their loan accumulations in part to repurchases from the GSEs or other securitization pools.”

More than a third of the respondents indicated that they expect to increase their residential holdings during the first half of this year.

On loans secured by commercial real estate, most respondents indicated that there was no net change in their standards. Around one-in-five banks cut lines of credit on commercial construction, and one-in-10 said demand had strengthened over the prior three months.

The Fed said that around 40 percent of banks had tightened loan-to-value ratios. Debt-service coverage ratios were tightened by a smaller share of the banks.

Bank loan officers in the latest survey were “significantly more upbeat than in past years” about delinquencies and charge-offs this year.

A significant share of the banks reported that they expected improvements in delinquency and charge-off rates during 2011 for all major loan categories. While residential delinquency was the least likely to improve, over a third of those surveyed expected an improvement in HELOC delinquency and nearly 40 percent projected improvement in prime mortgages.

“Large banks were somewhat more likely than small banks to report expectations of improvement in the quality of residential real estate loans,” the report said.


Mortgage Daily Staff


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