Nontraditional Loans Rising, Fed Says

Commercial bank originations of "nontraditional" mortgages, such as interest-only and option ARMs, accounted for nearly 25% of residential loan production over the past 12 months, according to a Federal Reserve Board survey.More than half of the 49 banks surveyed in July increased their originations of nontraditional loans over the past year -- with large banks being the most aggressive. Nontraditional loan production rose at 21 of the 31 large ($20 billion or more) banks surveyed, compared with only six of the 18 smaller banks. Loan officers at six large banks reported that nontraditional mortgages constituted 26% to 50% of loan production, while only two smaller banks matched that level of production. Two other large banks said nontraditional mortgages represented 51% to 75% of their loan production. The majority of banks (39 out of 45) reported that they securitize less than 25% of their nontraditional originations. However, four large banks and one small bank securitize more than half their nontraditional originations. "On balance, a majority of the banks indicated they are less likely to securitize non-traditional products than traditional mortgages," the Fed said.