Banks Loosen Mortgage Standards Amid Weakening Demand

Strategic Insights -

Banks continued to ease their mortgage lending standards even as demand weakened over the last three months, according to a Federal Reserve survey of senior loan officers. The survey follows recent reports of slowing growth in mortgage debt and a drop in applications for new mortgages, as higher interest rates keep more home buyers on the sidelines. Meanwhile, banks reported easing credit standards for business loans, but demand grew at a slower pace.

Key Takeaways:

  • Demand for mortgages to purchase homes weakened over the last three months, with nearly a third of respondents reporting demand weakened slightly, up from 14% in July.
  • The portion of banks reporting moderately stronger mortgage demand fell to 9% in October vs. 33% in July.
  • More banks continued to report looser standards for home mortgages, with a net 3.7% easing standards.
  • The survey has recorded loosening credit standards for six of the last eight periods.
  • Federal bank regulators are wary that too-liberal lending standards could lead to a spike in bad loans.
  • The Comptroller of the Currency, John Dugan, stated that even high-quality, affluent borrowers are taking advantage of flexible payment mortgages that allow them to squeeze into bigger loans by making smaller initial monthly payments.
  • A net 40% of domestic banks increased the maximum size of primary mortgages that they will provide over the past two years.
  • About 30% of banks increased the maximum size of second mortgages, and a quarter boosted the upper limit for loan-to-value ratios.
  • The Mortgage Bankers Association's refinance index peaked in 2003 and is now 81% off its high.
  • Last week, the refi index shed 3% after rates on 30-year fixed-rate mortgages jumped 16 basis points to 6.31%.

Statistics:

  • 31% of banks reported weakening demand for mortgages, up from 14% in July.
  • 9% of banks reported moderately stronger mortgage demand, down from 33% in July.
  • 40% of domestic banks increased the maximum size of primary mortgages over the past two years.
  • 30% of banks increased the maximum size of second mortgages.
  • 25% of banks boosted the upper limit for loan-to-value ratios.
  • The Mortgage Bankers Association's refinance index is 81% off its high since 2003.
  • The refi index shed 3% last week after rates on 30-year fixed-rate mortgages jumped 16 basis points to 6.31%.

Sources:

  • Federal Reserve survey of senior loan officers, as reported on October [not explicitly stated in the text].
  • Comptroller of the Currency, John Dugan, as quoted in the article.
  • Mortgage Bankers Association's refinance index data, as reported in the article.
  • Federal Reserve's H.8 data, as reported in the article.