A dramatic increase in the demand for residential mortgage loans has led banks to tighten lending standards once again, according to a new report by the Federal Reserve.
In the Senior Loan Officer Opinion Survey, respondents were asked to compare the willingness of their institution to originate a GSE-eligible 30-year fixed-rate mortgage loan for a home purchase today with their willingness to grant such a loan in 2006, based on various credit risk scores and down payment scenarios. According to the summary report, “A large majority of banks indicated that they were less likely to originate a GSE-eligible mortgage loan to potential borrowers with a FICO score of 620 and a 10 percent down payment than they were in 2006.” Lenders were also more cautious about originating mortgages for borrowers with a FICO score of 680, regardless of the down payment, or a FICO score of 720 with a 10 percent down payment.
The uncertain outlook for the housing market, a higher risk of delinquent mortgages, and the difficulty in obtaining mortgage insurance coverage were a few of the factors that influenced the decision-making process, respondents noted.
The survey also found that 30.2 percent of lenders experienced a stronger demand for traditional mortgage loans in the first quarter of 2012, up from only 3.8 percent of lenders in the fourth quarter of 2011. In addition, a net 23.1 percent of respondents noted an increased demand for non-traditional residential loans in the first quarter of this year.
In light of the uptick in demand, some banks have further tightened their lending standards. For the first quarter of 2012, a net 11.3 percent of respondents reported that they had put greater restrictions on lending standards for non-traditional residential loans, and 1.9 percent reported tightening lending standards for traditional residential mortgages.
Tightening the lending standards may be appropriate for lenders to protect themselves from potential mortgage defaults. As noted in the survey, uncertainty concerning housing prices and the economy make defaults a high risk. However, deregulation of the banking industry has given lenders much power over the economy – perhaps too much power. The banking industry needs to remember that greater power brings greater responsibility.
We believe that leaders within the banking industry should put the good of the economy before the good of their respective institutions. The housing market is a key component of the U.S. economy, and we need an increase in the demand for housing to get the market back on track and subsequently get unemployment down and the economy up. This means the banks will need to take a risk and loosen lending standards – a move we hope to see later this year.
In the meantime, many homeowners who are underwater with their current mortgages are unable to refinance or qualify for a new mortgage in light of the tightened lending practices. If you are unable to make your mortgage payments and are afraid that the bank may foreclose on your home, call our office at 972-342-0011. We can explore the possibility of a short sale, to help you get back on your feet and protect your family’s financial future.