Senior loan officers queried by the Federal Reserve say nontraditional loans constitute a greater percentage of their loan portfolios than subprime mortgages, but that loans in both categories are performing as expected or better.

Of the 30 domestic banks with subprime residential mortgages on their books, nearly three-fourths said they accounted for less than 5 percent of their mortgage portfolios. One-fifth reported the share of such subprime loans was between 5 percent and 15 percent. Only three banks, or 10 percent of those surveyed, said subprime loans made up more than 20 percent of the mortgages on their books.

The quality of those loans, as measured by delinquencies and chargeoffs, has remained unchanged over the last 12 months, 73 percent of those surveyed said. About 17 percent said subprime loan quality had deteriorated “somewhat,” but none reported a substantial decline in quality. Three loan officers, or 10 percent of those surveyed, said the quality of their subprime residential real estate portfolio had actually “improved somewhat.”

Looking forward, about one in three loan officers expects loan quality on subprime mortgages to “deteriorate somewhat,” with the rest expecting them to stabilize around current levels. On average, the loan officers said standards for granting subprime loans would remain basically unchanged.

Most of the 48 banks with non-traditional loans on their books said they made up more than 5 percent of their total portfolios. Loan officers at nine banks, or 19 percent of those surveyed, said non-traditional products accounted for more than 20 percent of loans.

Non-traditional residential mortgage products included adjustable-rate mortgages with multiple payment options, interest-only mortgages, and “Alt-A” products such as mortgages with limited income verification and mortgages secured by non-owner-occupied properties.

Only two banks reported a decline in the quality of their non-traditional portfolios, while 87 percent said they remained unchanged. Eight loan officers said non-traditional loans had performed somewhat better or much better than expected, although 33 percent expected quality to deteriorate “somewhat” in the next 12 months.

Nearly one-third of 50 loan officers who were asked to rate the demand for residential real estate loans used to finance homes for investment purposes in the last 12 months said it is moderately or substantially weaker.

The July 2006 Senior Loan Officer Opinion Survey on Bank Lending Practices is available on the Federal Reserve Board’s Web site.

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