Rising defaults on U.S. subprime mortgages have been wreaking havoc at many large banks and financial institutions, and now the same problems are leaking into the small-bank sector, Reuters reports.
Small-capitalisation banks, which typically hold less than $4 billion of assets, are tightening credit like their larger counterparts, but are now getting stuck with mortgages they had hope to sell, rather than hold in their own portfolios.
Much of the recent turmoil has focused on Wall Street banks and hedge funds that dove too deeply into home loans once thought safe but which ultimately proved sour. Many borrowed heavily, hoping to generate higher returns.
“We’re only going to do very stable credit quality loans,” says Marcia Bradshaw, senior vice president of mortgage lending at Virginia Commerce Bancorp Inc., an Arlington-based bank with $2.1 billion of assets. “We’re not putting anything on the books that’s risky in any way.”
Smaller banks have been left with 30-year mortgages on their books, eating into profit margins and forcing them into short-term borrowing.