Lending Standards on Prime Residential Mortgages Ease Only Slightly but Demand Remains Strong


Results from the Federal Reserve Board’s Senior Loan Officer Opinion Survey indicate that, on net, a small fraction of banks eased their lending standards for business and consumer loans over the previous three months. They also reported that respondents noticed little change in residential real estate lending standards on balance. Meanwhile, a significant share of banks reported a strengthening of demand for commercial real estate loans, residential mortgages, and auto loans, while demand for other types of loans was relatively unchanged.

In its October iteration, the Federal Reserve included special questions for senior bank loan officers regarding lending standards on FHA-insured purchase mortgages and their respective bank’s use of the Home Affordable Refinance Program. Banks reported that they were more willing to approve an FHA mortgage for borrowers with a higher FICO score.  Applications with lower FICO scores were less likely to be approved for a FHA-insured purchase mortgage. At the same time, 41.9% of banks surveyed estimated that the Home Affordable Refinance Program accounted for between 10% and 30% of refinance applications received in the previous three months. This result was 11.9 percentage points greater than when the question was posed in July.

The October survey continues to illustrate that lending standards affecting the supply of prime residential mortgages remain basically unchanged at still tight levels while demand for prime residential mortgages is strengthening. On net, survey respondents indicated that obtaining a prime residential mortgage has become slightly easier over the past three months. In the October survey, 4.7% of respondents indicated that they had eased their lending standards, while 3.1% of banks reported having tightened them. However, this change was small and the vast majority of firms, 92.2% kept their lending standards basically the same.

While lending standards have remained relatively unchanged since the second quarter of 2010, bank respondents have indicated that demand for prime residential mortgages is growing, on net. Although demand growth dipped somewhat in the latest survey release, the share of banks reporting stronger demand for residential mortgages continues to exceed the percentage for banks experiencing weaker demand by a wide margin. Thirty-nine percent of respondents indicated that demand for prime residential mortgages had strengthened over the past three months, while 6.3% reported that demand had weakened. In the previous release, 57.3% of respondents indicated that demand for prime residential mortgages was stronger, while 4.9% indicated that demand was weaker. Since the survey’s release in April 2011, when 34.0% of banks indicated that demand for residential mortgages was weaker on net, a growing percentage of banks have observed strong demand for prime residential mortgages.

Although banks may be reluctant to finance residential home purchases, the likelihood that they will extend credit for other consumer loans is growing. On net, 32.8% of banks reported stronger demand for prime residential mortgages; only a net of 1.6% of respondents eased their credit standards on these products. However, for other consumer loans, the percent of banks easing credit standards is occurring at the same time that banks are also experiencing a stronger demand for these loan products, facilitating the likelihood of bank lending. Eleven percent of banks reported easing credit standards for credit cards and 8.5% of respondents experienced stronger demand for credit cards. Ten percent of banks indicated that lending standards had eased for automobile loans while 16.9% of respondents indicated that demand for automobile loans was stronger on net. Meanwhile, 3.1% of senior loan officers reported that credit standards had eased on all other consumer loans while 4.8% of banks indicated that demand for these loans had strengthened on net. While the combination of strong demand and easier lending standards is likely improving bank lending in most consumer loan markets, sticky lending standards in the residential mortgage market may be contributing to a shortage of prime residential mortgages and slowing the recovery in the residential housing market.

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