The Psychology Behind the Recovery

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Th e M Rep o RT | 41 O r i g i nat i O n s e r v i c i n g a na ly t i c s s e c O n da r y m a r k e t ORIGINATION the latest mortgage demand down in latest Fed survey Loan officers report the drop as loan terms tighten slightly. a survey of bankers from nearly 100 institu- tions turned up mixed numbers for credit standards and loan demand in the last three months. The Federal Reserve released its January 2014 Senior Loan Officer Opinion Survey, a poll examining changes in lending standards and demand in the latest quarter. The results include responses from 75 domestic banks and 21 U.S. branches and agencies of foreign banks. According to the findings, a very small net percentage of banks tightened lending standards on prime residential mortgages over the last few months, with 1.4 percent saying standards have "tightened considerably." The share of banks that either tightened or eased standards "somewhat" offset each other at 8.5 percent each, while the majority—81.7 percent—report- ed no change. Looking at bank size, 16.7 percent of large banks reported easing standards, while a combined 5.6 percent tightened their criteria. Among smaller banks, 14.3 per- cent reported tighter standards, and none reported easing. Of the few banks offering subprime mortgages, 20 percent tightened standards, while 80 percent left them alone. A survey released late January from the Office of the Comptroller of the Currency indicated more banks last year were easing standards to stay competitive. However, the period covered in that survey ended in June. Whether it was because of higher hurdles to clear or last year's rise in interest rates, a moderate fraction of banks reported a drop in demand for prime purchase mortgages, with a combined 47.9 percent saying demand was weaker. Only 19.7 percent saw greater consumer in- terest in prime residential loans; the remaining 32.4 percent said demand was "about the same." Demand for home equity lines of credit (HELOCs) was little changed, with 16.9 percent of banks reporting stronger de- mand and 19.7 reporting weaker demand. On net, more banks reported easing HELOC stan- dards than tightening—7 percent compared to 4.2 percent. In a special question posed for January's survey, the Fed asked banks about their expectations for loan delinquency and charge- off rates over the next year, as- suming economic activity moves in line with consensus forecasts. Reponses indicate most banks have higher expectations for loan quality this year. On net, 46.5 percent of banks surveyed expect quality to improve somewhat for prime residential mortgages, while 33.3 percent said subprime loan quality should improve. For HELOCs, a net 33.4 percent of respondents said loan quality is likely to improve this year. elevated standards Bite into Originations But they did make 2013 loans the best vintage on record. W hile most hous- ing metrics ended 2013 on a slightly slower—but still promising—growth path, mort- gage origination volumes closed out the year on a decidedly sour note, Black Knight Financial Ser- vices (BKFS) said in its year-end Mortgage Monitor Report. Overall, last year was a very positive one for the housing mar- ket, according to BKFS' numbers: Home prices through November were up 8.5 percent annually, while sales in the year's first 11 months outpaced full-year totals for each of the prior three years. The same can't be said for loan originations, which the company says ended 2013 at their lowest level in five years. "[H]igher interest rates and seasonality pushed monthly originations to the lowest level since 2008, and the current inter- est rate environment seems to have also brought an end to the refinancing wave we've observed for the last several years," said Herb Blecher, SVP of BKFS' Data & Analytics division. "In fact, refinance activity has remained low despite year-end declines in interest rates." With the Federal Reserve moving forward with its plans to taper asset purchases and interest rates forecast to rise, Blecher says origination activity will likely come from looser underwriting and home equity lending, which has seen significant gains as first mortgage lending falls. While reports from Ellie Mae and the Office of the Comptroller of the Currency indicate standards continue to loosen, BKFS said that trend has largely been focused on refi- nances, whereas purchase loan standards have remained fairly flat for the last four years. Still, today's tight standards have their upside: In its recent Mortgage Monitor, BKFS revealed 2013's loans were "the best vintage on record." "Even adjusting for credit scores and loan-to-values, we are seeing total delinquencies for 2013 loans at extremely low levels across every product category," Blecher said. 46.5 percent of banks surveyed expect quality to improve somewhat for prime residential mortgages, while 33.3 percent said subprime loan quality should improve.

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