March 2016 - RIP Dodd Frank

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46 | TH E M R EP 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 Gender Affects Ability to Obtain a Mortgage Loan Men tend to have higher credit scores, even though they also tend to hold more debt. A lthough credit standards are easing, a borrower's credit score remains an integral factor in determining if he or she will get approved for a mortgage loan; but there is also a demographic factor that could stand in the way of homeownership for many Americans. A borrower's credit score could be adversely affected by gender, according to a study from Men have an average credit score of 630 out of 850, while women have an average score of 621. But here's where it gets interesting: Men have higher credit scores than women even though they have higher debt and credit card balances. These factors could mean that men are able to get a mortgage loan easier than women. The report explains that men tend to have higher wages compared to women. In the study, 23 percent of men reported earning $75,000 or more annually, while only 18 percent of women said that they earn at least $75,000. "While income does not play a direct role in credit scoring formulas, it enables consumers to mange their credit well—which, in turn, leads to higher credit scores," the report stated. A recent survey from the Federal Reserve showed that credit standards are easing among lenders. Some are questioning if the easing has gone too far. Although lenders are being selective of whom they lend to in terms of credit score, overall, mortgage lending standards have eased every quarter over the last two years. According to the Fed survey, credit standards have eased moderately on some categories of residential mortgage loans, while demand for these loans weakened. During the fourth quarter of 2015, 11 of the 63 banks surveyed noted that credit standards on GSE-eligible loans had eased somewhat, while two banks said lending was tight somewhat. Government residential mortgages eased somewhat for four of the 59 banks questioned and tightened for four banks. Matthew Pointon, Property Economist at Capital Economics, questioned whether or not the eased credit standards could be the early signs of another financial crisis. He ultimately determined that "fears that we are embarking on a repeat of the dangerous cut in standards that contributed to the financial crisis look premature." "Given how tight mortgage lending standards were at the height of the financial crisis, it is no surprise—and a welcome development—that banks have been gradually easing standards for the past two years," Pointon noted. "We expect that will continue, helping mortgage lending to grow at a steady pace over the next couple of years. But there are few signs that lending criteria are returning to the ultra- loose conditions that contributed to the mid-2000s boom. Bankers' memories may be short, but they are not that short." OCC: Banks Healthy, but Credit Risk Levels … Not So Much In its annual report, the OCC said today's federal banking system is stronger than it was before the financial crisis. T he housing market is six years into the current recovery, and while banks are generally in good health, worrisome signs of credit risk are still prevalent among these institutions. The Office of the Comptroller of the Currency (OCC) 2015 Annual Report, which is re - quired by Congress to report "a summary of the state and condition" of the national bank- ing system and any recommenda- tions for "any amendment to the laws relative to banking," found that banks are performing well, but maintaining the influx of growth is becoming challenging. The report showed that banks were generally profitable in 2015 and experienced "steady loan growth and relatively few problem assets." System-wide profitability reached 10.0 percent in 2015, up from 9.9 percent in 2014, but still well below pre-crisis levels. Both net interest income and noninterest income increased during the first half of 2015 among banks, while net income rose $3 billion year-over-year. "The improving economy stimulated loan growth in the fed - eral banking system in 2015," the OCC report stated. "The result is a stronger federal banking system than existed before the crisis." Thomas J. Curry, Comptroller of the Currency, noted that some banks are targeting less credit - worthy consumers and easing their lending standards to keep up with growing competition. "If these loans deteriorate, and if banks do not have the appropriate risk management processes and structures in place to measure, monitor, and control the increased credit risk, banks could be forced to curtail lending even to creditworthy customers, adversely affecting the broader economy," the report said. Banks should consider the meaning of success, both in the short and long term, by rewarding behaviors that contribute to the institution's long-term safety and soundness and not just those that add to its bottom line in the near term, according to the report. Curry noted that there are two kinds of competition among banks: • Negative competition is the type that can lead to lower- ing standards and adopting shortcuts in risk management and controls. • Positive competition, on the other hand, fosters innovation in product quality, customer service, and managerial efficiency. "Banks that engage in responsi - ble innovation are likely to remain relevant to their customers and se- cure in their role in the payments and credit systems," he said. Curry added, "It's important that banks continue to think out - side the box. It's just as important that their regulators think outside the box as well. In the run-up to the financial crisis, complex products were introduced faster than state and federal regulators could absorb and comprehend them. With hindsight, it's clear that banks didn't fully understand the risks some of these products entailed. But then again, neither did their regulators, and that is our responsibility."

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