Industry Reported Strong Loan Growth

WASHINGTON -- The banking industry's profits hit a record $22.3 billion in the first half of 1994, up 5.7% over the first six months of last year, the Federal Deposit Insurance Corp. said Thursday.

Earnings in the second quarter were $11.2 billion, up $141 million from the first quarter and $876 million more than in the year earlier period.

The rising profits are due to increased loan demand, wider margins, and improving asset quality at the 10,715 banks reporting, the FDIC said.

Total loan volume grew $57.6 billion, more than in any quarter since the fourth quarter of 1986, to $2.2 trillion from April through June.

Mortgages made up the bulk of the lending growth, rising $20.9 billion to $944 billion. Consumer lending grew to $438.5 billion, up $16.7 billion; about half of that increase was due to additional credit card balances. Expanding in four of the last five quarters, commercial and industrial loans grew $15.4 billion to $565 billion in the second quarter.

As lending increased, hanks' securities holdings declined.

For the first quarter in more than three years, bank securities holdings fell - by $6.5 billion, to $849 billion. A rise in mortgagebacked securities was offset as banks' Treasury securities declined $9.7 billion during the quarter.

An accounting change requiring banks to mark securities available for sale to market caused a $5.6 billion drop in the value of bank Securities during the second quarter.

The after-tax effect produced a $3.6 billion hit to bank capital, the FDIC said. Still, bank equity increased $4.3 billion in the quarer LTV ratios to default more frequently than lower LTV ratios."

The agency, formally the Federal Home Loan Mortgage Corp., notified its lenders of the new requirements (see table, page 10) in a letter sent out last week.

It will affect all loans closed after the end of this year except those with 15-year and 20-year terms. The agency is reducing the coverage required on these loans, which build equity more quickly.

Mr. Stamper said slower house appreciation and tax laws that make it advantageous even for affluent borrowers to load up on mortgage debt were contributing to higher LTV ratios.

He declined to say how much of Freddie's business consists of mortgages with down "payments smaller than 15% of the house value. But in data released to investors, the agency has said that the average loan-to-value ratio for its mortgages rose to 75% at the end of the second quarter, from 70% a year ago.

A national survey conducted by the Federal Housing Finance Board shows that high LTV loans are a growing portion of the market. Forty-nine percent of all loans had less than 20% down in July, up sharply from 36% in July 1992.

Fannie Mae is widely expected to follow Freddie's lead. For one thing, if it does not act, it will likely get a larger share of highLTV loans than Freddie Mac, and take on higher risk.

Spokesman David Jeffers acknowledged that the agency, formally the Federal National Mortgage Association, is looking at the changing mix of its own business, but he declined to discuss details.

He said Fannie Mae was balancing the impact of any move on its ability to buy loans made to low- and moderate-income borrowers.

Lenders said they were puzzled by Freddie's move. Some wondered whether Freddie Mac could be signaling that it would prefer to buy fewer loans made to lower-income borrowers.

That would mn counter to the agency's public pronouncements, as both it and Fannie Mae face mounting regulatory pressure to expand this part of their business.

Freddie Mac "pays better prices for lower loan-to-value" mortgages, said Michael Conway, executive vice president of marketing at Noah American Mortgage Co., Santa Rosa, Calif.

"That's OK from an economic standpoint, [but it] penalizes 1owto-mod people who have to get mortgage insurance," Mr. Conway said.

The latest move is a "double whammy, for first-time homebuyers and people without down payment," Mr. Conway added.

Mr. Stamper of Freddie Mac emphatically denied that the agency's move is in any way "connected to a lessened cornmitment to affordable housing."

Nor, he said, is it driven by an increased concern that more such business is driving up the loanto-value ratios and risk profile of Freddie's purchases.

He said Freddie Mac planned to stick to the increase even if Fannie does not impose a similar hike. The agency is willing to give up market share in order to protect the credit quality of its business, he said.

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