Mortgage Lending Standards Continue to Ease, Survey Says

Mortgage Lending StandardsA survey from the U.S. Federal Reserve released last week shows that a number of major financial institutions pulled back on their mortgage lending standards by the end of calendar 2014, easing standards on mortgage loans in general, including those eligible for purchase by Fannie Mae or Freddie Mac.

Despite the Fed’s revelation that a lot of major institutions dialed down on the restrictions, close to 85 percent of all banks surveyed said that their underwriting standards were relatively the same as they were. The Fed’s January 2015 survey of senior loan officers added that close to one-third of all banks polled also said that demand for Fannie Mae and Freddie Mac mortgages was a bit weaker, which likely explains the decision of certain banks to offer more lenient standards than they used to in the past.

Majority of the banks surveyed said they forecast delinquencies for consumer loans, including, but not limited to prime auto loans and credit cards, to remain steady in 2015. Close to one-third of banks, however, said that they expect subprime auto loan performance to go down this year. In addition to the above questions, the Fed also introduced new, and more in-depth questions about mortgages that meet the recently-updated criteria of the Consumer Financial Protection Bureau.

One of the more divisive reforms introduced last year was the CFPB’s qualified mortgage (QM) set of guidelines, and the Fed made sure to focus on QM as a new feature for its January 2015 survey. “Modest net fractions of large banks indicated that they had eased standards on GSE-eligible and QM non-jumbo, non-GSE-eligible mortgage loans, as well as on both QM and non-QM jumbo mortage loans,” wrote the Fed. “Regarding changes in demand, modest net fractions of banks of all sizes reported weaker demand across most categories of home-purchase loans.”

The Fed’s statement added that few institutions had changed standards on home equity lines of credit, or HELOCs, and while majority of banks did not report a significant change in HELOC demand, there were several major ones claiming stronger demand for such products.

Most of the financial institutions surveyed said there was not much change in commercial and industrial loan underwriting standards, but those who relaxed their standards justified their decision by stating competition from other institutions. Interestingly, though, the number of banks that eased their standards for business loans was “noticeably lower” than on previous senior loan officer polls.

This brings to fore one of the more interesting takeaways on the Fed survey, which is how most banks do not expect much change to take place in the performance of business loans. Syndicated leveraged loans, however, are the exception to this. A good number of domestic and foreign banks polled said credit quality may be a bit poorer in 2015.

Be that as it may, federal regulators have expressed several concerns about the boom in the leveraged loan space, as it includes high interest rate loans that private equity firms make use of to finance buyouts of other enterprises.