The strong performance of residential mortgage loans has probably peaked, according to the Federal Deposit Insurance Corp., which says it expects delinquencies to increase over the next few years, especially for interest-only and payment-option ARMs."Despite favorable delinquency and default trends so far, analysts fear that the current rising interest rate environment combined with cooling home prices will limit borrowers' options when faced with large monthly payment increases," the agency says in the latest issue of "FDIC Outlook." The FDIC also notes that the popularity of IOs and option ARMs and the easing of credit standards has moved the mortgage credit cycle into "uncharted territory," and says there is great uncertainty as to how these mortgages will perform. "Despite today's low loss rates, credit risk remains the most important long-term threat to bank earnings," FDIC chief economist Richard Brown said. "Bankers and bank regulators need to remember that rapid expansion in loan volumes often leads, over time, to declining credit quality."

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