The Federal Reserve Board recently released its quarterly survey of senior bank loan officers. The traditional questions asked by the survey address changes in the standards and terms on, and demand for, bank loans to businesses and households over the past three months. The most recent survey results indicate that a moderate fraction of large banks reported that they had eased standards on prime residential mortgages over the past three months, while banks of smaller size had reportedly left their standards on these loans about unchanged.
The October 2013 iteration of the Senior Loan Officer Opinion Survey also included a special set of questions on the effect of the increase in mortgage rates on mortgage lending. The Federal Reserve indicated that its interest in the change in mortgage application volume stemmed from the 100 basis point increase in the national average 30-year fixed-rate mortgage rate between May and October 1. As Chart 1 illustrates, on net, a greater portion of senior loan officers observed a decline in home purchase loan volume over the May-September period. According to the chart, 24.6% of senior loan officers indicated that applications for home purchase loans grew over the period, but 42.0% of bank officers reported that loan volume for home purchase loans was lower. The rest, 33.3%, which is not shown in the chart, indicated that loan volume was about the same over the period.
However, while the share of senior loan officers citing lower volume was similar across geographic concentration, the proportion of senior loan officers reporting higher home purchase loan volume was significantly greater at the large regional banks. According to the Federal Reserve, “large banks” refer to large national banks while “other banks” encompass large but regional banks, considered smaller than their large national bank peers. As a result, demand for home purchase mortgages may have fallen by a greater extent at large national banks than at the large regional banks.
Although a greater share of loan officers overall observed a lower volume of home purchase loan applications over the past five months, a greater share expect applications for these loans to rise over the next twelve months. In the October 2013 iteration of the Senior Loan Officer Survey, the Federal Reserve Board asks how the volume of applications for home purchase loans will evolve at each respective bank over the next 12 months assuming that the economy and interest rates evolve in line with consensus forecasts. According to one survey of professional forecasters, the consensus on the 10-year Treasury note is expected to rise by 58 percentage points to 3.2%. The interest rate on a 30-year fixed rate mortgage rate, which typically exceeds the rate on the 10-year Treasury note by between 1.5% and 1.75%, should rise to between 4.7% and 4.95%.
The expectation of future home purchase loan volume varies between large national and large regional banks. On net, senior loan officers at large national banks expect home purchase loan volume to rise in the coming year while a net share of officers at large regional banks expect to receive fewer home purchase loan applications.
Overall, 37.6% of senior loan officers expect loan volume for home purchase applications to rise over the next 12 months while 30.4% expect loan volume to decline. A greater share of senior loan officers at large national banks expect loan applications for home purchases to rise in the next 12 months, 41.2%, than expect applications to fall, 20.6%. Relative to officers at large national banks, fewer officers at large regional banks expect an increase in home purchase application loan volume, 34.3%, but a greater proportion of officers at these “other banks”, 40.0%, expect the volume of home purchase loans to fall at their respective bank.