A recent article in the online MReport Daily (“Underwriting Standards Ease as Banks Vie for Business”) repeats the same information I’ve been reading on
many other financial sites over the past few months: QM and ATR is not spelling gloom and doom for the residential financing industry. According to the report:
The Office of the Comptroller of the Currency’s (OCC) latest underwriting survey shows lending standards have continued to relax as banks duke it out over a dwindling market.
Out of the 86 banks reported on in OCC’s 19th Annual Survey of Credit Underwriting, 22 percent loosened overall underwriting standards on retail products, examiners say—up from 15 percent in 2012. Meanwhile, only 10 percent tightened lending criteria, down more than half from the previous survey.
Singling out residential mortgages, OCC examiners report 11 percent of banks offering loans eased standards, up slightly from the 2012 survey. Thirteen percent tightened standards (compared to 25 percent previously), while 76 percent left them untouched.
Why should this be? Here are some of my thoughts:
- Banks make money when the make loans;
- Since interest rates have clicked up a bit, and the refinance boom is likely behind us, banks are focusing their attention to beefing up their purchase money loans. As long and Fannie and Freddie buy the paper, lenders will oblige;
- FHA and USDA are still serving the needs of folks with lower credit scores;
- There is nascent evidence that some funds are putting their collective toes into the private secondary mortgage market, perhaps to pick up the non-QM loans that the GSEs won’t purchase;
- There is a whole new generation of potential buyers who have not been in the marketplace, and are just now doing so;
- Owners, now seeing the first glimmers of equity in their heretofore “underwater” homes, are considering in the market place, who will be needing loans
Two additional tidbits from the article:
Despite the drop in standards, examiners indicated risk in residential mortgage portfolios remained unchanged or decreased at 87 percent of banks.
While credit opened up for mortgages, the same wasn’t true for home equity loans—both conventional and high loan-to-value (HLTV). Five percent of banks eased underwriting standards for conventional home equity loans, down from 18 percent, while 22 percent tightened their standards.
Conclusion. There are still some naysayers out there predicting that borrowers will face increasing difficulty in obtaining affordable home loans. I respectfully disagree. To me, the reality is that with lenders feeling the pinch of new CFPB regulations, higher capital requirements, and with sources of riskier revenues drying up [e.g. proprietary trading] my guess is that many banks are going to focus on making money the old-fashioned way – through residential lending. Isn’t that a novel idea?!
