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The FDIC reported that profits at commercial banks and
savings institutions declined 3.4% from year-earlier levels in the
second quarter of 2007, dragged down by higher expenses for bad loans
and narrower net interest income. The sector’s net income in the
quarter was $36.7 billion.

Loan-loss provisions totaled $11.4 billion in the quarter, a 75.3%
increase from the year-ago period. The value of loans and leases that
were noncurrent (90 days or more past due or in nonaccrual status)
grew 10.6% from the previous quarter, the fifth consecutive quarterly
increase. The noncurrent loan rate was 0.90% at the end of the
quarter, an increase from 0.70% in the second quarter of 2006.

On the positive side, commercial and industrial loans grew by a
record $51.3 billion (4.1%) in the quarter. Loans to small businesses
increased at an annual rate of 9.6%, a sharp increase from the 3.5%
growth for the 2005–2006 period.

The complete report is available in the Quarterly Banking
at www2.fdic.gov/qbp/index.asp.

Federal financial regulators and the Conference of State
Bank Supervisors (CSBS) issued a statement encouraging federally
regulated and state-supervised financial institutions to identify
residential mortgage borrowers at risk for default and pursue loss
mitigation strategies that preserve homeownership.

The statement notes that a significant number of hybrid
adjustable-rate mortgages will reset throughout the remainder of the
year. Many subprime and other mortgage loans have been transferred
into securitization trusts governed by pooling and servicing
agreements that may provide servicers with the flexibility to contact
borrowers ahead of loan resets, especially in cases where default is
reasonably foreseeable.

The statement was issued jointly by the Federal Reserve, FDIC,
Office of the Comptroller of the Currency, Office of Thrift
Supervision, National Credit Union Administration and the CSBS. The
Statement on Loss Mitigation Strategies for Servicers of
Residential Mortgages
is available at www.fdic.gov/news/news/press/2007/pr07073a.html.

In a separate release, the FDIC, CSBS and American Association of
Residential Mortgage Regulators cautioned institutions against
allowing debt-to-income (DTI) ratios above 50% in applying loss
mitigation strategies. Loss mitigation strategies should create
long-term stability for borrowers, investors and the marketplace, the
agencies said. DTI ratios above 50% increase the future likelihood of
delinquencies and defaults.


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