Bank Lending Still Stingy

The Mortgage Corner

The Federal Reserve just published its quarterly Senior Loan Officer survey on lending standards by the largest banks. They basically adhere to the strictest Fannie Mae and Freddie Mac guidelines for residential loans, such as minimum 620 credit score and debt-to-income ratios around 45 percent. Banks were a bit more liberal with commercial and industrial loans—apartment lending in particular, which is red hot due to dropping vacancy rates.

The banks“…on balance, reported having eased their lending standards and having experienced stronger demand in several loan categories over the past three months,” said the report.

But not in housing, perhaps the largest segment and one that gives consumers the greatest feeling of financial well-being. Even with record low interest rates banks are being stingy, which is why there is a record some $1.76 trillion in excess reserves sitting at the Fed. Banks’ overall lending has increased just 3 percent per annum of late, versus the historical 6 percent during good times, as in this Federal Reserve graph that dates from 1987 Q1 to 2013 Q1.

Graph: Federal Reserve

This could change, however, as loan delinquency rates continue to decline and banks become less risk averse. Calculated Risk just reported Processing Services (LPS) released their Mortgage Monitor report for March. According to LPS, 6.59 percent of mortgages were delinquent in March, down from 6.80 percent in February. LPS reports that 3.37 percent of mortgages were in the foreclosure process, down from 4.19 percent in March 2012.

This gives a total of 9.96 percent delinquent or in foreclosure. It breaks down as:
• 1,842,000 properties that are 30 or more days, and less than 90 days past due, but not in foreclosure.
• 1,466,000 properties that are 90 or more days delinquent, but not in foreclosure.
• 1,689,000 loans in foreclosure process.
It is a total of ​​4,997,000 loans delinquent or in foreclosure in March, down from 5,589,000 in March 2012.

The March Mortgage Monitor report also found that new problem loan rates (seriously delinquent mortgages that were current six months ago) have fallen below 1 percent for the first time since 2007. At 0.84 percent, the March new problem loan rate is approaching pre-crisis levels, and nearing the conditions of 2000-2004 when the rate averaged 0.55 percent. However, as LPS Applied Analytics Senior Vice President Herb Blecher explained, a borrower’s equity position is still a key indicator of his or her propensity to default.

“There has always been a clear correlation between higher levels of negative equity and new problem loan rates,” Blecher said. “Looking at the March data, we see that borrowers with equity are actually outperforming the national average -- at 0.6 percent, this group is quite close to pre-crisis norms. The further underwater a borrower gets, the higher those problem rates rise. Borrowers with loan-to-value (LTV) ratios of just 100-110 percent are actually defaulting at more than twice the national average. For those 50 percent or more underwater, we see new problem rates of 4 percent.

Graph: LPS

“Still, the overall equity trend has been a very positive one,” Blecher continued. “LPS’ latest data shows that the share of loans with LTVs greater than 100 percent has fallen 41 percent from a year ago. In total, there were approximately 9 million such loans, or about 18 percent of active mortgages. Some states, including the so-called ‘sand states’ (Arizona, Florida, Nevada and California), are still well above the national level, at an average 28 percent, but they, too, have seen improvement over the last year, with negative equity dropping over 40 percent across those four states since January 2012.”

So we know that rising housing values will continue to benefit homeowners and lenders. As foreclosure rates continue to fall, there is less downward pressure on housing values, since foreclosed homes sell on average some 33 percent below market prices.

Corelogic just reported that home prices nationwide, including distressed sales, increased 10.5 percent on a year-over-year basis in March 2013 compared to March 2012. This change represents the biggest year-over-year increase since March 2006 and the 13th consecutive monthly increase in home prices nationally. On a month-over-month basis, including distressed sales, home prices increased by 1.9 percent in March 2013 compared to February 2013.

Banks are not doing much for the housing market, in particular, leaving Fannie Mae and Freddie Mac to guarantee 90 percent of current home loans originated by lending institutions. Meanwhile, the Federal Housing Finance Authority has just announced it will no longer allow Fannie and Freddie to guarantee so-called ‘non-qualified’ loans after 2013, which are basically those loans that don’t amortize principal to be paid off in 30 years or less, such as interest only mortgages.

The hugely excess reserves held by banks once again highlight their conservative nature. And with Fannie and Freddie withdrawing from all but the most basic mortgages, we can only hope that other lending institutions—such as Mortgage Banks and Credit Unions—will recognize the lending opportunities that rising housing prices afford, if the housing recovery is to continue.

Harlan Green © 2013

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