Banks continue to ease mortgage lending standards, but it’s not helping

Lending

The Federal Reserve released the latest Senior Loan Officer Opinion Survey on Bank Lending Practices earlier this week.

The survey gets it data from 70 national banks. Further, the seven categories of residential home-purchase loans that banks are asked to report on are GSE-eligible, government (FHA, VA, USDA), QM non-jumbo non-GSE-eligible, QM jumbo, non-QM jumbo, non-QM non-jumbo, and subprime.

Economists use the report to gain knowledge on consumer behavior, as the report includes all forms of lending.

For the third quarter of 2018, banks reported easing their standards on most categories of residential real estate loans, even while experiencing weaker demand for the products overall.

Standards and the demand for auto and credit loans remain unchanged, by way of comparison. At the same time, banks reportedly left their standards unchanged on most categories of commercial real estate (CRE) loans, while demand reportedly weakened for most categories of such loans.

Overall, banks reported they were less likely to approve such consumer loans for borrowers with FICO scores of 620 in comparison with the beginning of the year, while they were more likely to approve such consumer loans for borrowers with FICO scores of 720 over this same period.

The big question is in regard to the yield curve. If long-term interest rate products (such as mortgages) begin to yield at rates lower than short-term interest rate products, the yield curve is said to invert. This is often viewed as a predictor of a coming recession.

“Significant shares of banks indicated that they would tighten their standards or price terms across every major loan category if the yield curve were to invert,” noted the Fed report.

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