Most US lenders would survive bursting of a real estate bubble

The rating agency applied a loss given default (LGD) stress test to the rated universe of firms – including US banks, thrifts, and specialty finance companies. The stress test results showed that only 6 firms had a net income loss greater than their first-quarter earnings in 2005; the rating agency used this measure as a gauge of capacity from an earnings perspective to withstand a spike in credit losses.

Standard & Poor’s says that while it expects housing price trends to be regional and driven by local economic and unemployment factors, rating actions will ultimately be based on the degree of credit and interest rate risk that banks are willing to accept in their portfolios, and how well they are able to manage these risks.

Adjustable-rate mortgages accounted for around one-third of single-family mortgages originated in the US last year. These products, combined with the growth in home equity lines of credit products and increasingly lax underwriting standards means that US mortgage portfolios are becoming more credit risky.