FDIC: Banks Continued Residential Mortgage Lending amid Economic Uncertainty

Amid ongoing pandemic-related economic uncertainties, the nation’s banks maintained the flow of credit by continuing to make residential mortgage loans, according to an article published in the FDIC Quarterly. The article noted that “community banks in particular have maintained strength in residential lending,” and that community banks’ share of all residential real estate loans has remained consistent at around 26% for more than a decade.

“Unlike in 2008, when a financial crisis resulted in an economic crisis and the banking system entered a long period of balance sheet repair, the banking system was much stronger in 2020 and better able to withstand economic distress,” the FDIC noted. “Banks have been in a position to help support the economy by extending credit and by working with distressed borrowers.”

Mortgage delinquency rates spiked sharply in early 2020 when the pandemic began, following several months of steady decline, but fell again as COVID-19 relief programs were instituted, the FDIC noted. This was driven mostly by a decrease in 30- and 60-day delinquencies; the FDIC found that while delinquency rates among borrowers with mortgages more than 90 days past due tapered off slightly at the end of 2020, they picked up again in early 2021, “reflecting the more entrenched distress of those with longer-term delinquencies.”

Overall, bank underwriting standards tightened in 2020 in response to weakening economic conditions. The FDIC said it has also seen weakening in bank asset quality since mid-2020, and noted that credit quality concerns remain—especially as COVID-19 relief programs begin to expire and borrowers continue to face financial challenges. However, while the noncurrent loan balance remains higher than in recent years, “noncurrent loan balances after the [2008] financial crisis were more than three times larger,” the agency observed.