Mortgage Lending Expected to Rise, but Risks Remain

The Federal Reserve Board released the latest results from the Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS). Responses to the April survey indicate that mortgage lending is expected to rise over the coming year, but certain risks could derail its recovery.

In each survey iteration, the SLOOS asks senior bank officers to assess their business and consumer lending activity, providing information on the change in both their bank’s lending standards and in demand for various bank products. In addition to these routine questions, the SLOOS will also include a set of special questions that address developments in banking practices of timely interest.

In its most recent installment, the SLOOS included a special question that asked domestic banks to assess the likely change in certain types of residential real estate assets such as loans, agency mortgage-backed securities (MBS), and private-label MBS. On net, senior bank officers expected their banks holdings of total residential real estate assets to rise in the coming year, reflecting an expansion in their holdings of residential real estate loans. According to Chart 1, a net of 18% of bank respondents expect their bank’s holdings of total residential real estate assets to increase in the coming year, 38% expect their holdings of total residential real estate assets to rise while 20% expect their bank’s holdings to decline over the coming year. The remaining 42% did not expect their holdings of total residential real estate assets to change over the coming year. A net of 27% of respondents expect their bank’s holdings of residential real estate loans to rise while on net, bank officers expect their bank’s holdings of MBS, agency and private label, to decline.

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A special question also asked senior bank officers to assess the change over the past year in factors affecting mortgage lending. According to Chart 2, mortgage lending has become relatively more profitable for banks over the past year, but certain risks have also increased. On net, 40% of bank respondents said that risk-adjusted profitability of mortgage lending relative to other possible uses of funds had increased. However, 39% of senior bank respondents on net mentioned that GSE putback risk, which is the forced repurchase of mortgages sold to GSEs, had also risen. A net of 27% of senior bank officers thought that guarantee fees charged by GSEs, fees charged to lenders for bundling, servicing, selling and reporting MBS to investors, had increased over the past year. Meanwhile a net of 12% of bank officers said that investor appetite for private-label securitizations had increased over the past year and a net of 17% of senior bank officers agreed that balance sheet capacity had increased over the past year.

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The ultimate impact of each individual factor on mortgage lending activity depends not only on its change over the past year, but also on its relative importance. In response to a special question asking bank officers to describe the importance of these same factors for mortgage lending, profitability and GSE putback risk, two mortgage lending factors that the largest share of bank respondents said had increased the most over the past year were also the two most important factors restraining mortgage lending. The results show that 78% of bank officers cited profitability as an important factor restraining mortgage lending and 74% of bank respondents cited GSE putback risk as “important”.

Although Chart 2 shows a relatively sizeable net share of bank officers cited guarantee fees, a high volume of applications that exceeds processing capacity, and servicing costs upon borrower delinquency as having increased in the past year, these factors are near the bottom in terms of their importance for mortgage lending as shown in Chart 3. Conversely, while a relatively smaller net share of bank respondents cited the economic and housing outlook, mortgage insurance, and investors’ appetite for private-label securitizations as having increased over the past year, these factors are relatively more important to mortgage lending than guarantee fees charged by GSEs, a high volume of applications, and servicing costs upon borrower delinquency.

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