Late Mortgage Payments Surge

Late mortgage payments surge
Regulators see big problems emerging with subprime loans, increasing credit distress with hybrid mortgages.
February 22 2007: 2:43 PM EST
WASHINGTON (Reuters) -- Late payments for residential mortgages shot up by 15.6 percent in the fourth quarter, U.S. regulators said on Thursday in a report showing record earnings by commercial banks and thrifts in 2006.
The Federal Deposit Insurance Corporation, which insures deposits at more than 8,600 banks and savings institutions, said the increase in late mortgage payments followed a 5.2 percent increase in the third quarter.
Noncurrent mortgage loans - payments that are more than 90 days late - grew by $3.1 billion in the last three months of 2006 after rising by $974 million in the third quarter, the FDIC said.
Richard Brown, FDIC's chief economist, said regulators are seeing emerging signs of distress among subprime loans, especially with hybrid mortgages that subject borrowers to higher monthly payments after introductory interest rates.
"While the degree of credit distress in these portfolios is still well below the peaks that we saw during and after the 2001 recession, it seems likely that their performance will get worse before it gets better," Brown said.
Bank regulators are considering new rules on popular loans for subprime borrowers with less-than-stellar credit that carry low introductory rates but can rise over the life of the loans.
Consumer advocates have warned that loose underwriting standards will soon have homeowners buried under mortgage debt.
Brown said that total subprime mortgages outstanding amount to about $1.3 trillion, of which $700 billion are held by private asset-backed securities issuers.
That means banks, thrifts and other mortgage lenders are holding about $500 million in subprime mortgages, Brown said.
Financial institutions insured by the FDIC held about $2.2 trillion of mortgages for single to multifamily homes at the end of 2006.
"We know for certain that more than three quarters of the mortgages held by all FDIC-insured institutions are prime loans," Brown said. "The actual percentage is certainly higher - perhaps as high as 85-90 percent."
For the fourth-quarter FDIC-insured commercial banks and savings institutions posted net income of $35.7 billion, 9.3 percent higher than the fourth quarter of 2005, but lower than $38.1 billion earned in the third quarter.
For the year, banks earned $145.7 billion, topping the 2005 total of $133.9 billion and marking the sixth straight year of record earnings, the FDIC said.
The FDIC said the industry's performance in the last three months of 2006 was stronger than the numbers indicate because restructurings at a few large institutions resulted in understated income and expense items.
"The banking industry continues to perform well," FDIC Chairman Sheila Bair said in a statement, "even as an inverted yield curve and weakening mortgage market have made the operating environment more challenging."
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