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Drop In Mortgage Loan Charge-Offs Leads to Smaller Losses for Banks

bank [1]Fewer charge-offs for mortgages have resulted in the smallest losses for banks on loans since before the recession, according to the Federal Deposit Insurance Corp. [2]'s Quarterly Banking Report for Q2 2014 released on August 28.

A "charge-off" means the bank reports the balance of the loan as a loss when the account becomes so delinquent that the bank doesn't think the borrower will pay.

For Q2 2014, FDIC-insured banks charged off a net total of $9.9 billion, the lowest amount for any quarter since the second quarter of 2007, according to the FDIC. The total is down from $14.1 billion since Q2 2013. The amount banks charged off for mortgages on 1-to-4 family homes plummeted by 75 percent since last year, a big reason for the overall decline.

Analysts see the dropoff in bank loan losses as a sign that both borrowers and lenders are economically healthier, which is a possible indicator that the overall economy is improving. According to the FDIC report, only 6.8 percent of banks were unprofitable in Q2, which is the smallest percentage in eight years.

A net income of $40.2 billion was reported in Q2 for the 6,656 FDIC-insured banks and other institutions that filed financial reports for the quarter, an increase of 5.3 percent (about $2 billion) from this time last year.

Banks loan losses decreased year-over-year for the 16th consecutive quarter in Q2 2014, according to the FDIC. Except for auto loans, which saw a 10.4 percent increase in net loan charge-offs, all other major loan categories saw year-over-year dropoffs in the amount charged off in Q2. More than half of all FDIC-insured banks (50.8 percent) saw a year-over-year decline in the quarterly amount charged off in Q2. Also, the non-concurrent loan rate fell to its lowest rate since 2008 in Q2 at 2.24 percent. The FDIC concluded based on these findings that the overall lending environment in the U.S. is strengthening.