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. Could this be the beginning of yet another financial crisis?
Credit standards among mortgage lenders tend to change with overall economic conditions. The Federal Reserve's January 2016 Senior Loan Officer Opinion Survey on Bank Lending Practices shows that credit standards may be easing among lenders.
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 pointed out that this is the seventh consecutive quarter that lending standards have been eased, the longest this trend has lasted since the mid-1990s.
Pointon noted, "fears that we are embarking on a repeat of the dangerous cut in standards that contributed to the financial crisis look premature."
He also mentions that the Fed survey does not provide any information on the current level of mortgage lending standards, but only shows the change in direction in lending standards. The ease in lending standards comes just after banks began to hold back during the crisis.
The latest loan-to-value (LTV) data seems to be nearly as accommodative in today's market as they were just prior to the financial crisis, according to Pointon. The Federal Housing Finance Agency showed that 34 percent of conventional single-family mortgages closed in 2015 had an LTV of 80 percent or above, compared to 38 percent recorded in 2007. Meanwhile, Ellie Mae data found that the average FICO score for successful mortgage applications went from 732 at the beginning of 2015 to 722 by the end (still higher than the average score of 700).
"That is not a bad thing. After all, an aggressive loosening in mortgage credit conditions was a key cause of the financial crisis," Pointon said. "And judging by the vitriolic reaction to a mortgage lender’s Super Bowl ad–which some construed as a return to pre-crisis lending standards–that hasn’t been forgotten."
He continued, "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. 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 which contributed to the mid-2000s boom. Bankers’ memories may be short, but they are not that short."
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