Evaluating National Bank Indicators Relative to Delinquent Subprime Mortgage Exposure

The housing boom that began in the late 1990s led lending institutions into the practice of making mortgage loans to borrowers with blemished credit histories and little or no way to repay their debt. Foreclosure on these subprime mortgages, as they were called, eventually became widespread; by 2008 the country was in a full-blown financial crisis, and many banks had been forced to close. The causes and effects of this ongoing crisis have been examined in detail, with emphasis on prominent national banks in particular. However, select national banks were not the only ones involved with subprime mortgages. A range of financial institutions across the country also engaged in subprime mortgage lending; some continued to operate successfully, while others were forced to file for bankruptcy protection or be bought out by competitors. This quantitative cross sectional study examined the historical financial data for FDIC chartered financial institutions, reported in the aggregate, in 39 states to determine the relationship between exposure to the subprime mortgage market and bank performance and risk. The historical financial data used in this study was gathered from the FDIC's online database for 2005 and 2009; delinquent subprime loan figures were gathered for the same time period from the Mortgage Bankers Association of America. The data were analyzed using correlation analysis to determine (a) what is the relationship between delinquent subprime mortgage exposure and bank performance and risk, and (b) how has this relationship changed over time? Correlation analysis bore out the presence of a significant relationship between delinquent subprime mortgage exposure and total risk-based capital ratio in 2009, significance value, and significant changes in the relationships between delinquent subprime mortgage exposure and yield on earning assets and delinquent subprime mortgage exposure and total risk-based capital ratio over time (2005 to 2009). This research can assist financial managers in their assessment of subprime mortgage exposure decisions and points to the need for additional research, particularly into the relationship between delinquent subprime mortgage exposure and other indicators of bank performance and risk.