Lenders Bracing for Possible Economic Downturn in 2007

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Lenders across the nation are beginning to brace for a possible economic downturn, as expectations for the economy's performance fell in the third quarter following two quarters of relative optimism, according to a survey of lenders by Phoenix Management Service, Chadds Ford, Pennsylvania.

Phoenix Management's quarterly Lending Climate in America survey noted that 59 percent of lenders predicted their financial institution would see a weakening in their loan portfolios in the next six to 12 months, while an additional 27 percent anticipated some portfolio deterioration in 12 to 24 months.

In anticipation, 43 percent of lenders said their lending institution would likely allocate additional resources to distressed portfolio management in the coming 18 months. However, 56 percent predicted no change in their financial institution's allocation of resources for loan workout efforts, according to Michael E. Jacoby, managing director of Phoenix Management Services.

"This quarter, a number of indicators that we track through lender surveys are beginning to trend downward- most notably, lenders' predictions about softening loan portfolios," said Jacoby. "Lenders are telling us they are on the alert for a coming economic downturn, perhaps as soon as 12 months from now."

For the second half of 2006, the survey indicated lenders believe the economy would perform at a "C-plus" level, down from the "B-minus" they predicted in the previous quarter.

Lenders were equally gloomy about the economy's performance during the first half of 2007. Most said it would perform at a low "C" level, down from the solid "C" they assigned it three months earlier.

Loan losses, bankruptcies and unemployment are all expected to rise, according to lenders surveyed. …