One of the biggest players in the home loan industry is getting worried about a trend toward smaller down payments.

Freddie Mac, the Federal Home Loan Mortgage Corp., is increasing the amount of mortgage insurance it requires on loans with down payments of less than 15%, starting next year.

The move comes as homebuyers, rather than refinancers, have come to dominate the mortgage market. Purchase loans generally carry smaller down payments, so the net effect has been to increase the risk of default.

The total impact of the insurance increase is uncertain because Fannie Mae, Freddie's larger rival, has not decided whether to follow suit. And mortgages held by lenders for investment, rather than being sold into the secondary market, are not affected by the agency move.

While the change will cost affected homebuyers an average of only about $10 a month, it is likely to be much debated, because of its impact on low-income households.

Explaining the rationale for the move, Michael Stamper, executive vice president of risk management at Freddie Mac said, "We expect loans with highBanks retained $5.3 billion in earnings and paid out $5.9 billion in dividends.

The industry's average equity-to-assets ratio remained steady at 7.84%.

Margins improved as rates rose in the second quarter. Average net interest margin was 4.4%, an increase of 14 basis points from the first quarter.

Average funding costs rose by 26 basis points during the quarter, the FDIC said, as banks shifted toward nondeposit liabilities and foreign-office deposits.

Asset quality continued to improve as noncurrent loans fell $4.5 billion to $35.9 billion. The biggest improvement came in real estate lending, where past-due loans dropped $2.3 billion.

Banks set aside $2.8 billion to cover loan losses in the second quarter, down $1.5 billion from second quarter 1993. Provisions for loan losses in the first half are down 40% from the same period a year ago.

The industry is on its way to breaking last year's annual earnings record of $43.4 billion. But with loan loss provisions at a 10year low, it is unclear whether banks can continue to boost profits by converting reserves to income.

In the second quarter, 408 banks converted $194 million in reserves to income, compared with year-earlier figures of 399 banks and $318 million.

First-half earnings barely edged out the six-month record set in the second half of 1993.

Second-quarter income would have been below first-quarter figures but for one-time gains several large banks registered on Brazilian bonds. The FDIC said these special earnings may have added $300 million to second-quarter results.

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