Mortgage demand is down and delinquencies and foreclosures are up, but just as the housing market bust is more of a soft landing, major financial institutions and most households aren't likely to crumble under the weight of risky loans.
While the number of riskier loans has risen in the past few years, lenders still hold more traditional mortgages than subprime and "non-traditional" mortgages.
Among the smaller fraction of buyers who use subprime mortgages and the larger fraction that use "non-traditional" home loans, those who also purchased homes at a time when prices peaked in their market are most at risk for an individual bust.
Most homeowners, however, should weather even a nasty housing market storm.
The Federal Reserve's July 2006 Senior Loan Officer Opinion Survey on Bank Lending Practices, defines subprime mortgages as loans made to borrowers with weakened credit histories stemming from payment delinquencies, charge-offs, judgments, or bankruptcies; loans made to borrowers with reduced repayment capacity as measured by credit scores or debt-to-income ratios; and loans to borrowers with incomplete credit histories.
The Feds consider as non-traditional mortgages, adjustable rate mortgages (ARMs) with multiple payment options; interest-only mortgages; mortgages with limited income verification; and mortgages secured by non-owner-occupied properties, among others.
Of the thirty domestic banks with subprime residential mortgages on the books, the Feds found:
- At three out of four banks, subprime mortgages accounted for less than 5 percent of their residential mortgages. One out of five said subprime loans accounted for 5 to 15 percent of their mortgage portfolio.
The remainder said the subprime share was more than 20 percent.
- Most, 83 percent, said the quality of their subprime residential real estate portfolios -- as measured by delinquencies and charge-offs -- remained unchanged or actually improved over the past year. Only about 17 percent said the quality had deteriorated somewhat.
- Two out of three lenders expect subprime loan quality to stabilize over the next 12 months with the remainder expecting the quality to deteriorate.
Greater risk may be afoot in the larger non-traditional prime loan category. When the Feds asked 48 domestic banks, the Feds found more substantial holdings in this category.
- About 45 percent of the banks reported a non-traditional loan share of less than 5 percent; 20 percent of the banks reported the share was between 5 and 15 percent and seven lenders said non-traditional mortgage products accounted for more than 30 percent of their home loans.
- Nearly 30 percent of banks indicated expectations that the quality of the non-traditional residential mortgage products currently on their books will deteriorate somewhat over the next twelve months. These banks accounted for more than 50 percent of all residential mortgages on the books of respondents at the end of the first quarter.
This July survey also included a special question about the demand for investment property financing.
- Thirty percent of the banks indicated that demand for these loans have weakened, 20 percent said demand was stronger and about 50 percent said demand remained the same over the past year.
