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Banks See Worse Subprime Quality

Banks See Worse Subprime Quality

Senior Loan Officer Option Survey released

August 15, 2006


photo of Coco Salazar
As loan demand weakened at banks, some believe subprime and nontraditional mortgage quality will worsen over the year.

The findings were part of the Federal Reserve’s second quarter Senior Loan Officer Opinion Survey on the lending practices of 56 domestic banks.

While there was little change in the easing of credit standards, the share of banks reporting weaker demand for residential loans rose to 60 percent in the July survey from only 25 percent in April, according to the Fed.

Seven of the 48 institutions that originate nontraditional mortgages said the loans accounted for over 30 percent of the loans currently on their books, while 45 percent reported a less than 5 percent share and about one-fifth said the share was between 5 percent and 15 percent.

A modest share of respondents indicated delinquencies and charge-offs on nontraditional portfolios had improved over the past year, while eight banks reported that the quality had performed better than expected, and only one institution indicated the quality was somewhat worse than had been anticipated, the Fed said.

“Looking forward, nearly 30 percent of banks, on net, indicated that they expect the quality of the non-traditional residential mortgage products currently on their books will deteriorate somewhat over the next twelve months,” the Fed said.

About eight of the 30 banks with subprime loans on their books said such mortgages represented less than 5 percent of their residential loans, six said their share was between 5 percent and 15 percent, and the remainder reported their subprime share was larger than 20 percent, according to the Fed’s announcement.

On net, about 10 percent of institutions with nontraditional and subprime loans indicated that they had tightened price-related terms on such mortgages over the same period.

A small share of respondents indicated that the quality of their subprime portfolios had deteriorated somewhat over the past 12 months, three institutions reported that the quality had performed somewhat better and only one bank noted subprime loans had performed somewhat worse than anticipated, the announcement said.

Over the next year, however, about one-third of respondents reported they anticipate that subprime loan quality will deteriorate, and the rest expect it to stabilize around current levels, the Fed said.

The July survey also reportedly revealed that nearly 10 out of 48 domestic banks reported stronger demand for loans to finance homes for investment purposes over the past year, and about 15 noted the demand had weakened over that period.

Coco Salazar is an assistant editor and staff writer for

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