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Banks appear to be effectively using a government program to help struggling borrowers refinance their underwater mortgages in order to make monthly payments more manageable.
August 6 -
In the Federal Reserve Board's most recent survey of loan officers, bankers have a host of concerns keeping them away from originating loans held by Fannie Mae and Freddie Mac.
April 30 -
The central bank's senior officer loan survey shows that while U.S. banks have made loans to European banks or their affiliates, their exposure appears relatively low.
November 7
WASHINGTON – While standards for issuing government-backed loans have clearly tightened for borrowers with spotty credit, bankers report the criteria for someone with a good credit score mirrors standards used before the crisis.
In the Federal Reserve Board's quarterly loan officer survey Wednesday, bankers were asked whether guidelines for approving Federal Housing Administration mortgages had changed from those used six years earlier. The survey – which assumed the borrower had a 3.5% down payment on a 30-year fixed loan – asked for responses about borrowers with three different FICO scores: 660, 620 and 580.
"A majority of domestic banks indicated that their lending standards for approving an application for an FHA-insured purchase mortgage were about the same as in 2006 for a borrower with a credit score of 660, but the standards had tightened for borrowers with lower FICO scores," the Fed said in the Senior Loan Officer Opinion Survey.
The survey – which is meant to update Fed policymakers about lending conditions – also found that banks still get a bulk of their refinancing applications from a government program meant to help underwater borrowers, and some institutions continue to tighten their lending standards for borrowers exposed to Europe.
On the question about FHA loan standards, 40 of the 51 banks surveyed said they were just as likely to approve loans for borrowers with a 660 score as they had been in 2006. Some even noted they would be "much more likely" to approve such loans.
However, for a borrower with a FICO score of 620, 32 banks – or nearly 63% – said they would be less likely to approve a loan under their current lending policies than they were before the crisis. For those prospective homeowners with a FICO score of 580, nearly three-fourths of lenders said that they would be less likely to approve such a loan using their current standards. Only a dozen banks said their likelihood of approval would be about the same in that category.
In a follow-up question, the Fed asked bankers to provide reasons why they were less inclined today to approve FHA-insured mortgages for less creditworthy applicants. Of the seven possible factors ranging from an uncertain outlook for home prices to potential insolvency of the FHA's insurance fund, bankers pointed to two specific drivers.
Nearly all bankers – 84% – were concerned about the higher risk of put-backs of delinquent mortgages by the FHA. A majority of bankers were also concerned that a high "compare ratio" – the ratio of a bank's delinquent FHA loans to the bank's delinquency rate for its whole geographic area – could possibly hinder their ability to participate in FHA programs.
Other factors included the higher servicing costs if a mortgage became delinquent; more than 50% of institutions agreed that was an important consideration.
Banks were also asked in the latest survey what portion of refinance applications they had received from borrowers in the last three months that had been tied to the government's second coming of the Home Affordable Refinance Program, which provides federal resources to help borrowers tap into historically low interest rates. The Fed asked a similar set of questions in its July survey, after the government had tweaked the original HARP to encourage more borrowers to participate.
Banks continued to indicate that a majority of new refinance applications filed at their bank were due to HARP 2.0, and they anticipated a significant portion of those refinancing applications would be completed and approved. Of those surveyed, 20% of banks said they expected at least 80% of their bank's HARP 2.0 applications would be completed, while roughly half said between 60% and 80% of their applications would be finalized.
As the Fed had done in the last four surveys, the central bank also asked banks about their lending to firms with exposures to Europe.
"Respondents to the domestic and foreign survey again reported that their lending standards to European banks and their affiliates had tightened over the past three months, but the fractions of respondents indicating that they had tightened standards declined significantly between the July and October surveys, on net," the Fed said.
Nine banks surveyed said they had tightened their credit standards for European exposures somewhat with more than a dozen saying it remained "basically unchanged."
Forty-six banks selected this response: "My bank does not make loans or extend credit lines to banks headquartered in Europe or their affiliates or subsidiaries."
Loan demand from European banks changed little. Roughly 86% said demand had stayed about the same with only two firms reporting that lending was "moderately stronger."
