Lending in the High Tech Age

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The Latest ORIGINATION Or ig i nat ion Bankers Anticipate Increased Demand for Credit E Activity may soon pick up for home equity loans, though. H igher interest rates continued to shrink the population of "refinancible" loans in August, but they may open the door for greater home equity loan activity, Lender Processing Services (LPS) reported in its August Mortgage Monitor. According to LPS' data, the monthly prepayment rate—historically a good indicator of refinance activity—has dipped more than 30 percent in the months since May, with mortgage interest rates climbing nearly 100 basis points in that same time. As a result of those shifts, the percentage of borrowers in loans with interest rates high enough for refinancing to make sense has dropped significantly, says Herb Blecher, SVP for the technology and analytics firm. "Over half of borrowers are now out of the money with respect to refinancing," Blecher said. "In December 2012, the population of potentially refinance-eligible borrowers stood at roughly 10 million. However, refinance activity during that time, along with rising interest rates, have shrunk that pool to just 5.7 million borrowers as of August." At the same time, though, rising interest rates—combined with improvements in home prices over the last year—may "wind up contributing to a new appetite for home equity loans," he added. "After bottoming out at the beginning of 2012, home prices are now at their highest levels since 2009, and borrowers who bought or refinanced within the last few years are quite likely to have accumulated additional equity in their homes," Blecher commented. Based upon an analysis of historical borrowing patterns and home value trends, LPS anticipates an increase in second-lien borrowing among borrowers who locked in at low rates and who want to tap into their equity without refinancing at a higher rate. In fact, if recent vintages follow the 2003 vintage, the number of firstlien mortgages that have a second lien on them could approach 50 percent by 2017, the company says. The M Report | 35 se c on da r y m a r k e t "The theme of the economic recovery seems to be 'slow and steady.'" Mortgage Rate Hikes Drain Pool of 'Refinancible' Loans a na ly t ic s refinances to exceed demand—an ven with interest rates acknowledgement of the fizzling projected to rise, bankers out of the refinance boom. expect consumer appetite Perhaps in reaction to the for credit will continue to Federal Reserve's willingness to grow over the next six months— taper its bond-purchasing proand most are ready to handle the gram in the near future, the maincreased demand, according to jority of survey respondents—72.2 poll results released by FICO. percent—forecast an increase in The survey of bank risk profesinterest rates for all consumer sionals, conducted for FICO by credit types. When the Professional asked when they Risk Managers' expect mortgage International rates to top 6 perAssociation cent (a level last seen (PRMIA), found 46 in November 2008), percent of respon20.2 percent said it dents expect the should happen in amount of new 2013 or 2014, with credit requested by 41.4 percent saying consumers to in2015 and 38.4 percent crease over the next saying 2016 or later. half-year, while just Bankers were 16 percent expect a also fairly optimistic decrease. The credit about the overall types discussed state of housing. included residential When asked if they mortgage and refibelieve subprime nance loans, small lending will return business loans, auto to pre-2008 levels, loans, student loans, — Dr. Andrew Jennings, 47.5 percent said they and credit cards. FICO believe it will never "The theme of the happen again foleconomic recovery lowing last decade's seems to be 'slow crash. A combined 8.1 percent and steady,'" said Dr. Andrew said subprime lending will bounce Jennings, chief analytics officer at back up in 2014 or 2015, while 44.4 FICO and head of FICO Labs. percent said it will take a few "Both consumer spending and income ticked up slightly during the years (2016 or later). Questioned on the possibility of summer. I'm sure that contributed another housing bubble in the next to the feeling among our responthree years, only about a third (35.6 dents that consumer borrowing is percent) said it's likely to happen. poised to increase." "This, along with the previous In the mortgage arena, nearly sentiment questions, suggests that 70 percent of those surveyed many are hopeful that the finanexpect credit supply to meet or cial issues of the previous decade exceed demand in the coming are firmly behind us," FICO said months, while approximately in its report. 80 percent expect credit for s e r v ic i ng A survey of bank risk professionals shows most feel good about the housing industry.

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