Mortgage Lending Standards: Different Strokes

One of the biggest obstacles to a stronger housing recovery has been tight mortgage credit. The Fed’s Senior Loan Officer Opinion Survey (SLOOS) shows standards vary widely by type of mortgage loan.

Mortgage Credit Availability: More than Meets the Eye

Stringent underwriting requirements for mortgages have been widely cited as a key obstacle constraining momentum in the housing recovery thus far in the cycle, particularly for the elusive first-time homebuyer. Indeed, while mortgage credit availability has steadily climbed over the past few years, standards are nowhere near as easy as during the go-go years prior to the Great Recession (top chart). Yet, the tightness of credit in aggregate for mortgage loans does not tell the full story. In the Fed’s most recent SLOOS, banks reported a net easing of standards for nearly all categories of residential mortgage loans, with the only exception being subprime mortgages, where standards are unchanged on net (middle chart). Yet, the percentage of banks reporting a net easing of standards varied considerably between different categories of mortgages. For instance, qualified mortgages (QM), designed to protect lenders and borrowers from the types of behavior that proliferated in the years prior to the housing bust, are seeing the most significant easing of standards. This likely reflects the fact that banks are generally more willing to make these loans due to the stringent underwriting requirements, such as a debt-toincome ratio below 43 percent. Thus, even as banks report relatively more easing for these types of loans, the rigidity of the mandated underwriting standards is likely to keep many buyers at bay.

Absence of First-Time Homebuyers: Supply or Demand Story?

Meanwhile, standards for government mortgage loans, which includes loans insured by the Federal Housing Administration, guaranteed by the Department of Veterans Affairs or originated under government programs, are seeing some of the lowest net percent of banks easing standards of any mortgage category. Yet, despite the relatively tight credit in this space, demand for these loans is among the strongest for any category of mortgages. Notably, this category tends to contain many first time homebuyers, which suggests that the well-documented weakness in the first-time home buying market may be more of a function of tight supply rather than weak demand. Turning to the subprime mortgage market, demand here is among the highest of any category of mortgages. That said, in the survey, a “vast majority” of banks reported that they were not providing subprime borrowers with home mortgage loans, and banks are not reporting an easing of standards in this space. These anecdotes should assuage broader fears of a return to the risky lending behavior that characterized the previous crisis. Looking ahead, we expect the recent pickup in single-family housing activity to continue, and for first-time homebuyers to gradually come back from the sidelines as personal income continues to advance at a solid pace (bottom chart).