Regional Loan Performance Varies

Mortgage loan performance at FDIC-insured banks across the nation has slipped only slightly from record levels, according to an FDIC region-by-region examination of banking conditions.

However, some negative trends have emerged, the winter edition of FDIC Outlook concluded. These include a narrowing of net interest margins, emerging signs of credit distress in subprime mortgage portfolios and increasing concentrations of traditionally riskier commercial real estate loans.

But the extent of these negatives varied along with local conditions in the FDIC’s eight regions.

Most optimistic were the views of the four-state Southwest region, the 11-state San Francisco region and the six-state New England region.

The Southwest’s FDIC-insured banks and thrifts reported historically low mortgage past-due and charge-off rates for third quarter 2006, the report noted. And while the housing market is slowing nationally, it continues to be a source of growth for the Southwest.

In 11 of the 14 major markets in this region, a smaller percentage of mortgages were used for second or investor homes than in the country as a whole, while homebuilders have kept inventories in check by limiting new construction.

Finally, the report predicts that “the area’s robust population growth should support continued strong demand for housing.”

In the San Francisco region, which includes the nine westernmost states plus Hawaii and Alaska, seven states ranked among the lowest in the country for past-due loan levels as of midyear 2006, while at the same time banks and thrifts in the majority of states in the region reported median Tier 1 capital-to-asset positions above the national average.

In New England, despite a slowing of the housing market, mortgage loan growth continued strong in 2006, with a median growth rate of almost 10%. However, the report noted, growth in home equity loan portfolios slowed dramatically, falling a median 4% during the year ending with the third quarter of 2006, after expanding more than 20% in 2004 and the first half of 2005.

“Should housing sales and price appreciation continue to decelerate, mortgage loan growth likely will slow,” the report cautioned.

However, the report warned: “As mortgage loan portfolios continue to season in the face of decelerating rates of home price appreciation (or price declines) and the possibility of higher mortgage interest rates, credit quality could weaken in 2007 from historically low levels of past-dues and charge-offs.”

It also said that signs of weakening in New England housing markets could affect the performance of the area’s mortgage lenders.

Further, while 53% of all institutions and 78% of mortgage lenders nationwide reported narrowing net interest margins during the year ended Sept. 30, 2006, 85% of the mortgage lending specialists in New England reported narrowing net interest margins.

Overall, however, banks and thrifts in New England, 41% of which are mortgage lending specialists compared with 10% nationwide, appear prepared to weather the current slowdown in the housing market.

But the overall optimism of the FDIC’s region-by-region assessment of mortgage lending and housing markets was tinged with some cautious wording for some other regions.

Residential lending has been important to the banking landscape of the six-state Mid-Atlantic region, where a third of the area’s banks and thrifts specialize in residential mortgage lending, and the slowing housing market may hinder earnings growth prospects for FDIC-insured institutions in this region, the report said.

“Mortgage credit quality remained sound through mid-2006 as median past-due rates on total loans and residential mortgage loans reported by Mid-Atlantic-headquartered institutions were low and below the national median. However, the normal seasoning of new mortgage loans — coupled with slowing housing-related employment, decelerating rates of home price appreciation (and price declines), and higher mortgage interest rates — could result in some credit quality weakening in 2007 from historically low levels,” the report explained.

And, since mid-2004, it noted, the Mid-Atlantic’s mortgage lenders have experienced more severe contraction in net interest margin than mortgage lenders nationwide.

In several areas of the Atlanta region, the seven southeastern states, “rapid rates of price appreciation in recent years, rising property taxes and mortgage interest rates, and sharp increases in property insurance premiums, particularly in coastal markets, have sharply constrained affordability.”

These “negative trends in affordability” may have prompted the tripling of origination of innovative mortgages, from 10% of all originations in 2003 to 30% in 2005, with these products particularly popular in Florida and Virginia, where rates of home price appreciation have exceeded the national average.

Banks have mitigated the risks of these loans by selling many of them into the secondary market but their effect on bank credit quality still is “uncertain,” according to the report. Further, the report worried that the “expiration of low initial teaser rates and subsequent interest rate resets may stress the future repayment ability of some borrowers.”

Finally, in assessing the automotive industry’s economic impact on the six-state Chicago region, the report noted that mortgage foreclosures and personal bankruptcy rates in Indiana, Ohio and Michigan currently exceed those of most other states, with these three states also ranking as the top three nationwide for mortgage foreclosures in third quarter 2006.

“FDIC-insured institutions in auto-dependent states also are reporting rising rates of delinquent loans,” it stated. “Delinquencies reported by banks in Ohio and Michigan are near the ten-year highs reached in the 2001 recession. Delinquency rates have risen for a number of loan categories, with some of the greatest deterioration occurring in residential mortgage and commercial real estate loan portfolios.”

But the report did find a positive note regarding mortgage loans made by banks and thrifts in the areas hit by Hurricane Katrina.

“Generally,” it concluded, “real estate lenders in the affected areas required hazard and flood insurance, which has helped minimize losses in bank real estate loan portfolios.”