An interesting, yet troubling report from the U.S. Federal Reserve revealed on Monday that residential loan demand has become softer, even if financial institutions are now loosening their standards, among other variables that normally usher in a period of higher demand.
According to Barclays economist Michael Gapen, the U.S. housing market’s recovery “(has) been shallower than it’s been in previous years,” with the current pace of economy described as “choppy.” Demand for automobile loans and credit cards, unlike demand for mortgage loans, was higher on the Fed survey. And with that in mind, another number-cruncher, TD Securities deputy head for U.S. research Milan Mulraine, said that the lower demand for residential mortgage loans is “broadly” congruent with the reduced home sales activity reported in earlier months.
This marks the second straight quarter in which demand for residential mortgages had ticked down on the Fed’s surveyed. But the new survey, which covers quarter four 2014, did add that a lot of major American financial institutions have relaxed their rules and made it easier for consumers to apply for mortgages.
In an interesting note, the Fed’s survey sub-divided mortgages into seven categories, including Federal Housing Administration-backed mortgages, Fannie Mae and Freddie Mac-backed mortgages, jumbo loans, and others. Standards had loosened in six of these seven sub-categories, and only remained the same in the subprime loan space. Also, there was only one bank out of 69 who responded to the question that said they have tightened standards, and there were nine, including six major institutions, that reported an easing of standards.
Still, the Federal Reserve survey is indicative of the two-edged sword effect of rising home prices in the American mortgage space. For those who already own a home, price appreciation, which was very recently in the double digits, is a great thing as it helps build equity. It is especially helpful to those who are underwater on their mortgages, or owing more than the value of their homes; price hikes allow these consumers to rebuild their equity.
But for those planning to buy a home, these rapid home price hikes have been nothing but bad news, especially younger home buyers with lower FICO scores and less money to spend on mortgage payments. Fortunately, though, home price appreciation has become more reasonable as of late, while mortgage interest rates have also gone down substantially since one year ago.
It is also worth noting that the report of laggard mortgage loan demand from the Fed came shortly after Fannie Mae released the results of a separate mortgage lender sentiment survey. In that Fannie Mae survey, 88 percent of institutions polled said that they are planning to grow their mortgage business in 2015. There were no lenders included in the Fannie survey that had admitted plans of downsizing or leaving the mortgage origination space.
The Fed’s survey, which ran from December 30, 2014 through January 15, 2015, involved the central bank polling officials at 73 domestic financial institutions and 23 U.S. arms of international banks.