Insufficient staff to process loan applications and to get timely and accurate appraisals are two of the reasons lenders say are impeding their ability to originate and purchase more home loans, results from the Federal Reserve’s most recent quarterly lender survey shows. the report was released at the end of April but it has some interesting findings that are important today.
The Fed surveys lenders every three months to find out if lending standards are tightening or loosening, and in this latest three-month period they’re loosening, but not by much. As the Fed says in its inimicable prose, “A moderate net fraction of banks reported anticipating increasing their exposure to residential real estate assets over the next year.”
What’s interesrting about the report is that lenders say larger down payments aren’t that big of a deal to them for making more loans to borrowers with lower credit scores. Assuming borrowers with a FICO score of 620 made a downpayment of 20 percent rather than 10 percent, only a “moderate net fraction of banks” would make more loans, the Fed report says.
The idea that doubling the downpayment won’t lead to that much change in bank lending practices is consistent with what NAR has been saying for years in connection with federal banking regulators’ proposed qualified residential mortgage (QRM) rule. Regulators in drafting the rule have talked about imposing a stiff downpayment requirement to help ensure the rules create a class of loans that are considered safe, and thus can be sold 100 percent to investors. (If they’re not considered “safe,” lenders would have to retain 5 percent of the loan amount on their books, making the loans more expensive for borrowers.)
NAR has been saying all along that Congress never wanted banking regulators to impose a minimum downpayment requirement and has also been saying that larger downpayments aren’t what’s key when it comes to making safe loans. Rather, sound underwriting is the important factor, and this latest data from the Fed appears to back that up pretty clearly.
For borrowers with higher credit scores, in the 720 range, lenders said doubling the downpayment to 20 percent from 10 percent would likely induce them to make loans to these borrowers at about the same rate as they would have back in 2006, which would represent a “somewhat” higher percntage of loans than if borrowers put down 10 percent. Again, that sounds like anything but an endorsement of the idea that large downpayments equate to safe mortgages.
The survey also indicates that lenders continue to hold back in their residential lending in part because of regulatory uncertainty, which likely includes uncertainty over what that QRM rule will look like once its finally published, and what another lending rule, the so-called QM rule, will look like. The QM rule is the qualified mortgage rule and it’s a broad rule that the Consumer Financial Protection Bureau (CFPB) is writing to require lenders to ensure all borrowers who receive mortgage loans have the ability to repay the loan.
NAR has been saying that this QM rule needs to be broad and non-prescriptive so lenders can look at each loan application individually and make a lending decision based on the facts in each applicant’s file rather than be constrained by a cookie-cutter approach to evaluating applicants.
In any case, this latest Fed survey makes clear that lenders are not looking to big downpayments to improve loan quality, and at the same time, they don’t like all this uncertainty that these and other pending rules are imposing on the market. QRM and QM stem from the big Wall Street reform law that was enacted after the mortgage meltdown and now here we are two years later and lenders remain in a holding pattern.
Perhaps once they get some regulatory clarity they’ll start staffing up more to address the problem of insufficient staff for processing loans. But while regulatory clarity is important, it’s no doubt more important for the federal government to get the policy right, which means not releasing QM and QRM rules that are overly prescriptive.
Read the Fed report for yourself. It’s called the Senior Loan Officer Opinion Survey on Bank Lending Practices, April 30, 2012.