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Fed Mortgage Lending Survey Deemed Flawed

checklist [1]Earlier this week, the Federal ReserveĀ  [2]released their Senior Loan Officer Opinion Survey on Bank Lending Practices [3] (SLOOS), which found that banks lowered mortgage lending standards in the third quarter of 2015 [4]. However, new housing risk research shows that the survey is "flawed."

The survey, which includes responses from 69 domestic banks and 23 U.S. branches and agencies of foreign banks, found that household lending from banks have loosened their credit standards over the past three months on loans eligible for purchase by the GSEs and on qualified mortgage (QM) loans.

"The SLOOS shows that mortgage lending standards have loosened on net over the past year. This is the right signal, but the SLOOS arrives there by accident, rather than by design," said Tobias Peter, housing risk researcher at the American Enterprise Institute's (AEI) International Center on Housing Risk.

The survey is monitored closely by the mortgage industry as a key indicator for lending trends and changes reported directly from banks. But despite its huge following, Peter believes the survey is flawed and has identified a few discrepancies within it [5].

"Unfortunately, the information provided by the survey has always been limited at best, and useless at worst," Peter explained. "Limited because it only reports results based on about 60 loan officers. But even if these were representative for the fifty percent of mortgage lending originated by banks, it ignores the other half, consisting largely of much riskier originations by nonbanks. And useless because it showed no systematic loosening in mortgage lending standards in the run-up to the 2007/2008 financial crisis, which runs contrary to everything we now know."

In his research he points out that the Fed survey is not based on hard data (i.e. loan records), instead, it is based on the opinion of the 60 participating loan officers from commercial banks.

In addition, Peter mentioned that the Fed survey weighs all responses equally, rather than by their share of actual originations.

The survey also does not distinguish between loans with a government guarantee originated by all lenders, loans used to buy primary owner-occupied homes, second home purchases, or investor purchases.

"While the SLOOS can shed some light on mortgages without a government guarantee, which are not currently covered by the NMRI, the same flaws apply," Peter concluded. "Instead of basing evaluation of lending standards on a small survey of bankers that will send the correct signal only by accident or even worse, the wrong signal, policymakers and the public should direct their attention to an index grounded in facts, not opinions."

Click here [5] to read the complete report.