Some economists are warning that banks and mortgage lenders need to increase their loan-loss reserves to prepare for a potential downturn in the residential real estate market.

Banks have set aside very little to guard against unpaid loans during the housing boom. Loan losses are low now because anyone falling behind on payments can simply sell, pay off the loan and pocket the home equity. As a result, the reserve pools banks set aside are lower too.

But many banks have portfolios with a mix of riskier loan products that haven't been tested during a housing market downturn.

"There's no question that the extension of credit to borrowers has increased substantially, so you could expect that delinquencies and foreclosure rates will be higher," said Doug Duncan, senior vice president and chief economist at the Mortgage Banker's Association. "The question is whether the loans are appropriately priced and we won't know that until those loans go through an interest-rate cycle and the normal life cycle."

Southern California's largest home lenders, including Bank of America Corp., Wells Fargo & Co., Countrywide Financial Corp., Washington Mutual Inc. and Union Bank of California, have loan-loss rates near historic lows. Virtually all of them have beefed up their underwriting practices since the last real estate downturn in 1992 to 1994.

"We continue to see very low losses in our wholesale portfolios, and consumer losses remained below long-term average rates," said Wells Fargo Chief Credit Officer Dave Munio, who attributed low loan-loss reserves to "sound underwriting and collections practices" supported by a good economy.

Wells' outstanding loan portfolio rose 12 percent in the second quarter, to $300 billion, with home equity loans accounting for $56 billion of the total. The bank's provision for loan losses fell 4 percent in the second quarter, to $3.7 billion.

John Rice, senior vice president and manager of investor relations at Union Bank of California, said 97 percent of the bank's $11 billion residential mortgage portfolio is in California, but the bank (the operating unit of San Francisco's Unionbancal Corp.) has stringent underwriting standards.

"Credit quality is a cyclical thing and the collective perception in the banking industry is that it can't get a whole lot better than it is now," he said.

Bank of America, based in Charlotte, N.C., reduced the amount set aside for loan-loss and lease-loss reserves to 1.57 percent of loans outstanding as of June 30, down from 1.76 percent a year earlier.

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