Survey: Community Banks Optimistic on Mortgages

By MARCY GORDON | AP Business Writer

WASHINGTON (AP) - Smaller banks nationwide were "mildly optimistic" a few months ago about increasing mortgage lending this year because they have largely avoided the high-risk loan business, a survey released last week shows.

When community bankers voiced that hopeful view in October and November, the government had yet to announce extended relief for borrowers facing foreclosure, big banks had yet to report massive mortgage-related declines in profit for the fourth quarter, and the full extent of foreclosures last year - about 1.3 million U.S. homes - wasn't yet known.

The bankers' optimism may be fading, as the economy's slump deepens and mortgage distress increasingly spreads to less costly loans held by borrowers with strong credit. Community banks' performance often mirrors the economic health of the areas in which they do business. When local jobs are cut and homes go unsold, the local bank feels it.

The 7,900 or so community banks in the United States generally have posted strong earnings and growth rates in recent years, though their performance often is tied to their local economy. Often competing with credit unions and regional banks, a number have merged and some have failed in the last few years.

They range from institutions with close to $1 billion in assets such as Commerce Bank & Trust Co. in Worcester, Mass., and Lafayette Bank & Trust Co. in Lafayette, Ind., to tiny banks like INA Trust in Wilmington, Del.

In the survey by the American Bankers Association, 39 percent of the community banks polled late last year - 96 institutions - predicted that their home mortgage lending would increase this year, the same percentage as in the 2006 survey. An additional 39 percent of the banks predicted that their lending would remain at the same level.

Twenty-two percent expected their mortgage lending to decline, down from 27 percent in the 2006 survey.

Community banks generally are defined as having less than $1 billion in assets, though 36 of the 248 banks in the survey have assets exceeding that amount.

Community banks are making fewer mortgage loans, but "still remain financially strong and do not face near the volume of troubled loans on their books as their larger counterparts," a report of the survey said.

The average delinquency rate on home loans made by the banks surveyed was 1.1 percent, down from 1.4 percent in the 2006 survey and compared with the national average for all mortgage lenders of 5.6 percent in the third quarter of 2007. Mortgage payments that are 30 or more days past due are considered delinquent.

Community banks have mostly concentrated on conventional home loans to borrowers with strong credit, avoiding the costlier subprime mortgages for high-risk borrowers that have been engulfed in a wave of defaults, it said.

The mortgage crisis that began last spring all but wiped out fourth-quarter earnings at a number of major banks as they set aside large reserves for anticipated credit losses.

Because smaller banks were largely insulated from the subprime disaster, they are now in a position to absorb market share from mortgage lenders that are faltering, said Robert Davis, the banking association's executive vice president for housing finance.

The community banks surveyed said they sold 11.5 percent of their home loans to the government-sponsored finance companies Fannie Mae and Freddie Mac, and 14.6 percent to companies that bundle mortgages together, including Citigroup Inc., Countrywide Financial Corp., SunTrust Banks Inc. and Wells Fargo & Co.

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