FED SLOOS Details Impact of New Mortgage Rules on Approval of Mortgage Apps

The Federal Reserve Board recently released its survey of senior bank loan officers. The July 2014 Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS) addressed changes in the standards and terms on, and demand for, bank loans to businesses and households over the second quarter of 2014.

In the July 2014 iteration of the Survey, the Federal Reserve Board included a set of special questions on the effects on the approval rates for home-purchase loans from the Ability-to-Repay and Qualified Mortgage Standards under the Truth in Lending Act (the ATR/QM rule), which came into effect early in 2014.  The National Association of Home Builders has provided a comprehensive overview of the new rule. NAHB concluded from its analysis that some creditworthy borrowers could be denied access to affordable mortgages as a result of this rule’s implementation.

According to the results of the SLOOS, a fraction of banks reported that their approvals of mortgage purchase loans from individuals were likely lower because of the ATR/QM rule. However, as Chart 1 shows, the impact of the ATR/QM rule was disproportionately felt on approvals of prime non-conforming loans and on non-traditional loans relative to prime conforming loans; regardless of the credit score associated with the prime conforming loan application. As the Federal Reserve explains, “the majority of banks reported that the new rule has had no effect on the approval rate of prime conforming mortgages, in part because those loans qualify for a safe harbor under the exemption for loans that meet the underwriting criteria of the government-sponsored housing enterprises (GSEs)”.Presentation1

 

However, while in the aggregate, the majority of banks reported that their approval of prime conforming mortgage loan applications were not impacted by the ATR/QM rule, a disproportionate share of other, smaller, banks were more likely to report a decline in approvals of these loan applications stemming from the ATR/QM rule. As the data below indicates, a plurality of smaller banks, 50%, reported that the ATR/QM rule likely lowered their approval of prime conforming loans for borrowers with a FICO score less than 680 and 44% reported that the ATR/QM rule likely lowered their approvals of prime conforming loans for borrowers with a FICO score greater than or equal to 680. This compares to 22% and 19% respectively for large banks. Moreover, the result that a majority of all banks reported that the ATR/QM rule likely lowered their approvals of prime non-conforming and non-traditional loans, as indicated in Chart 1, reflected the impact of the rule on the approvals of these mortgage applications by smaller banks, as shown in Chart 2.

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Note: According to the SLOOS, conforming loans refer to prime residential mortgages with principal balances less than or equal to the conforming loan limits announced by the FHFA. Prime non-conforming loans refer to prime residential mortgages with principal balances greater than the conforming loan limits announced by the FHFA. Non-traditional loans include, but are not limited to, adjustable-rate mortgages with multiple payment options, interest-only mortgages, and “Alt-A” products such as mortgages with limited income verification and mortgages secured by non-owner-occupied properties. It excludes standard adjustable-rate mortgages and common hybrid adjustable-rate mortgages. Large banks refer to large, national banks while “other” banks encompass large but regional banks.



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