3 thoughts, speculations and conclusions on lending standardsby Keith Gumbinger
The latest survey of Senior Loan Officers found an acceleration in the easing of underwriting standards for Commercial and Industrial loans, continuing a now five-quarter trend. Demand for these kinds of financing was improving, too, so cheaper money may be becoming easier to get for business concerns.
The Fed’s survey also noted another easing in standards for “prime residential mortgages,” with about 8 percent of respondents to the survey noting easier terms and conditions. Given that something on the order of 90 percent of loans today kowtow to the still-stiff standards of Fannie Mae, Freddie Mac and the FHA, this leads us to a few thoughts, speculations and conclusions.
No. 1: Non-conforming terms are easing.
First on the thought list is that non-conforming terms (jumbos, etc.) are the most likely to be starting to open up. Of course, that can also be true for ARMs, since lenders tend to like to put them on their books directly and so have more complete underwriting control.
Despite the regulatory mess which the result of yet unformed/unclear/uncompleted Dodd-Frank rules, non-conforming and jumbo securitization markets are picking up steam, making lenders more confident in their ability to shed risk by selling products rather than keeping them.
No. 2: Overlays are diminishing.
The second is that even with tight standards, many lenders had instituted “overlays”–add-ons to minimum-credit requirements, down payments, etc.–and some of the loosening might be coming in the form of a reduction or elimination of them. That means that somewhat more marginal borrowers can get a crack at today’s rock-bottom mortgage rates.
With so many housing markets now recovering, it is becoming increasingly unjustifiable to charge an “Adverse Market Delivery Fee,” a 0.25 point surcharge added to all mortgages when the markets collapsed several years ago. The original fee first targeted certain areas experiencing trouble, and was later expanded to the entire market. Since the entire market is no longer “adverse,” the fee should go.
No. 3: It’s a combination of factors.
The last conclusion is perhaps a combination of factors:
- More competitive stances by lenders who are trying to keep market share and profits flowing. A slowdown in business due to a bump in mortgage rates earlier this year is probably a harbinger for what lies ahead.
- It also may be that, now years after the crisis, that sufficient analysis has been done so as to better understand what constitutes a truly “risky” borrower.
- As well, a strong run of mortgage-banking profits may play a role, as with home prices again rising, the risk of loss, both present and future, is diminished.
Fannie Mae reported record profits last week, too, making true reform of the GSEs somewhat less likely anytime soon, since those profits are all being turned back to the Treasury. However, with fantastic profitability comes pressure to do more for beleaguered homeowners and homebuyers, and it wouldn’t surprise us at all to see some tweaking to their underwriting guidelines before long.