The Three Percent Solution

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34 | Th e M Rep o RT 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 survey: credit loosening everywhere except Mortgages While easing standards for home loans might stimulate the market, benchmarks for retail and commercial loan underwriting might be ripe for tightening. d espite an easing of underwriting standards for commercial and retail loans for the third straight year, standards for residential real estate are holding mostly steady, according to the federal Office of the Comptroller of the Currency's (OCC) 20th Annual Survey of Credit Underwriting. According to the OCC survey, 92 percent of surveyed banks originated residential real estate loans in 2014, and a full 20 percent reported tightening their standards regarding who can attain these loans. Seventy percent reported no changes in their standards, leaving a comparatively slight 10 percent of institutions claiming they eased their standards for residential mortgages. Federal examiners found that the level of risk inherent in these portfolios remained unchanged or decreased at 88 percent of the banks—a growing trend since 2010. Since the 2013 survey of the four banks that originated HLTV home equity loans, one bank has exited the business. Two of the remaining three banks reported unchanged underwriting stan- dards and one bank reported moderately tightened standards. Examiners expect the level of risk over the next 12 months to decline or remain unchanged at all banks. Standards on loans for residen- tial construction remained over- whelmingly unchanged on the OCC survey, but offer a notable distinction from 2013. A full 88 percent of reporting banks said they neither eased nor tightened their standards on such products and none tightened its standards in 2014. In 2013, 8 percent tight- ened their standards and none eased them. This trend is definitely one federal watchdogs are keeping an eye on. Forty-five percent of examiners expect risk to increase over the next 12 months, based on concerns with the economic environment, collateral values, and easing underwriting stan- dards. Underwriting standards for CRE products (other than construction) have increasingly eased since 2010. The OCC's findings, in regards to residential products, sup- port a November report by the Federal Reserve, which found that mortgage credit standards remained largely unchanged between August and October. The Fed's Senior Loan Officer Opinion Survey reported that credit standards on prime mortgages remained basically steady at 83 percent of report- ing banks, while most of the 14 percent that reported easing their lending criteria were institutions with assets of $20 billion or more. Despite the continued diligence in the residential sphere, federal authorities are growing increas- ingly concerned with the overall easing of retail and commercial loan underwriting standards in the face of rising competition to win loan customers. "As banks continue to reach for volume and yield to im- prove margins and compete for limited loan demand, supervisors will focus on banks' efforts to maintain prudent underwrit- ing standards, monitor portfolio credit risk, and reduce excep- tions to policy," said Jennifer Kelly, senior deputy comptroller for bank supervision policy and chief national bank examiner. She added that 2014's trends in eased standards echo those seen between 2004 and 2006, just a few years before the crash. Reinforcing concerns of a too- tight credit market, a new measure of mortgage application denials suggests getting a loan might be even tougher for lower-credit bor- rowers than previously thought. Researchers at the Urban Institute (UI) say that previous "traditional" observations of mortgage denial rates (calcu- lated by dividing the number of denied mortgages by the total number of applications) provide an inaccurate look at credit avail- ability because they include ap- plicants with near-perfect credit profiles—those who are unlikely to be turned down for most products, in other words. "Because it conflates those with near perfect credit with those who might actually be denied a mortgage, the tradi- tional method fails to accurately reflect mortgage market trends," researchers Laurie Goodman and Wei Li wrote. By excluding those high-credit applicants, they say they can piece together a more accurate picture of how willing lenders are to accept applicants who might pose some risk. Using the adjusted calcula- tion, UI found that 43 percent of borrowers with less-than- perfect credit were denied in 2013, nearly triple the unadjusted estimate of 14 percent and up from 25 percent in 2004 (though Goodman and Li admitted that "the terms of many loans made in 2004 were not favorable to borrowers"). Furthermore, the study sug- gests that the gap in denial rates between white and minority applicants has been exaggerated by inaccurate reporting. While the observed denial rates for black and Hispanic applicants over the last 16 years have been nearly double that of white applicants, that disparity is narrower when looking only at low-credit profile Americans: 45 percent for black applicants, 41 percent for Hispanics, and 34 percent for whites.

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