Is Credit Finally Getting Looser? Don’t Believe It

*Is Credit Finally Getting Looser? Don’t Believe It*
**By George Yacik**

NEW-GeorgeY***Several articles have been written recently about the Federal Reserve’s recent lender survey, which raised hopes that banks have started to ease underwriting on residential mortgage loans. I’m sorry, but I just don’t see it, either in the market at large or in the Fed’s report on the subject.

****And until we do see some genuine loosening, the recovery in the mortgage and housing markets is going to continue to limp along and not move into high gear, no matter how low interest rates go and how long they stay there.

****It’s true that the Fed did find some loosening in its latest Senior Loan Officer Opinion Survey on Bank Lending Practices. But you need a high-powered microscope to see it.

****“On balance, a few (my emphasis) domestic banks reported having eased standards on prime residential mortgages over the past three months,” the Fed report said. Specifically, “a modest net fraction of banks were more likely to approve an application with a FICO score of 720 and a 20% down payment.”

****That doesn’t sound like a whole lot to get excited about.

****By comparison,“lending standards for nontraditional mortgages were little changed,” the report added. “Most banks indicated that their willingness to approve GSE-eligible home-purchase loan applications to borrowers with FICO scores of 680 or 720 was about unchanged relative to a year ago.”

****“Overall, only small numbers of domestic respondents reported changes in either standards or demand for any type of residential real estate lending during the previous three months, with the exception of a significant net fraction of banks that indicated that the demand for prime mortgages had picked up,” the report concluded.

****Hardly a cause for celebration, in my view. The Fed’s findings essentially come down to this: it’s now slightly easier to get a loan if you already had no trouble getting one, but for just about everyone else, nothing much has changed, in fact, it may have gotten even worse.

****Indeed, the Fed also found that about a third of lenders “indicated that they were less likely to approve home-purchase loan applications insured by the Federal Housing Administration with relatively low FICO scores,” meaning between 580 and 620.

****Those findings jibe with my own research. Lender after lender has told me that if anything, underwriting guidelines – in the form of overlays – have gotten more stringent recently, not less so, even though at the same time Fannie Mae and Freddie Mac have slightly loosened up their own requirements.

****Probably the biggest reason for that, of course, is that lenders are more worried than ever about Fannie and Freddie requiring them to repurchase loans that are less than perfect. Fully “three-fourths of banks cited the risk of put-back of delinquent mortgages by the GSEs as an important factor restraining their current ability or willingness to approve home-purchase loans,” the Fed report said, adding that “a large fraction of banks reported an increase in the importance of this factor over the past year.”

****Many lenders also haven’t taken any comfort from the rise in property values and homeowner equity over the past year or so. The Fed found that three out of four banks surveyed say their outlook for home prices or the economy at large are at “least somewhat important factors currently restraining” their real estate lending.

****But perhaps most important of all, lenders just don’t have much faith in the profitability of mortgage lending. Four out of five banks told the Fed that the “risk-adjusted profitability of the residential mortgage business relative to other possible uses of funds” was an important factor in their restraining mortgage lending, while a “large fraction of banks also reported an increase in the importance of this factor over the past year.”

****I can think of one reason why mortgage lenders are worried about the profitability of their business: They’re not making enough loans!

****While it’s certainly understandable that lenders are cautious, given what happened after the mortgage bubble burst, I think it’s fair to say that they’ve now gone way overboard in the opposite direction, denying loans to lots of creditworthy people.

****So, while it’s all well and good that the Fed is keeping mortgage rates at 4% or lower, it can’t do a whole lot to make lenders loosen up, even a little bit.

****“President Obama needs to use his bully pulpit to convince the big banks – the same institutions who were bailed out – to loosen lending requirements, and until that happens, all the government programs imaginable will only have a limited positive impact,” says Gloria Shulman, a mortgage broker in Beverly Hills.

****I’m not sure even the President can do that. Lenders have to take that step.

George Yacik has been a financial writer for more than 30 years. After working 12 years at The Bond Buyer and American Banker as a reporter and editor, he joined SMR Research Corp. as a vice president, where he was the lead research analyst and project leader for SMR’s studies on residential mortgages and home equity lending. Since 2008 he has been writing for a variety of mortgage-related and financial publications. George is based in Stratford, CT, and can be reached at