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WASHINGTON – A regulatory report released this summer helped to fuel hopes that banks were beginning to loosen up on making mortgage loans. But now it looks as if it was just a head fake.
The Federal Reserve Board’s Aug. 4 senior loan officer survey concluded that there was “a continued easing of lending standards and terms for many types of loan categories amid a broad-based pickup in loan demand.”
The report helped convince many market participants that a recovery with respect to mortgage lending is just around the corner, but mortgage strategists have seen no real change in conditions.
“We think the survey’s value is minimal and we caution against reading too much into it,” strategists said in a Bank of America Merrill Lynch Global Research report issued this month. They called it “the persistent myth of loosening mortgage credit.”
Chris Flanagan, the head of U.S. mortgages and structured finance for BofA Merrill, said the Fed’s survey only reflects changes in credit practices over the previous three months.
He noted that lenders tightened credit so much beginning in 2006 in response to the housing crisis that a loosening now is so miniscule that it doesn’t have much impact.
“It will take quarter after quarter of survey loosening to undo what was done during the crisis years,” Flanagan said in an interview.
He pointed to the Mortgage Bankers Association’s credit availability index as the “most accurate real time picture” of the cumulative net effect of mortgage tightening.
The MBA credit availability index peaked in 2006 at 869 when credit was extremely loose. The index bottomed out at 95 in April 2009. MBA recently reported that the index hit 116 in September. The MBA index has only increased six points so far this year.
“The Fed’s quarterly data for mortgages is somewhat irrelevant – one quarter’s of worth of loosening is meaningless,” the Bank of America report says.
Flanagan’s group also noted that senior loan officers were likely responding to a temporary pick up in mortgage applications that occurred in late April and early June.
“There is no evidence really of any change at this point,” Flanagan said.
In September, several homebuilders lamented that potential buyers were still having trouble qualifying for mortgages.
“We continue to hear some positive comments about loosening of underwriting guidelines and taking off the credit overlays,” said Larry Sorsby, the chief financial officer of Hovnanian Enterprises, on a Sept. 4 conference call.
“We have seen some evidence of that, but I would say it is really around the edges and fringes and hasn’t had much significant impact on underwriting for the entry-level buyer. We haven’t seen any significant easing.”
Jeffrey Mezger, president and chief executive of KB Home, said in a conference call last month that credit remains tight, particularly for first- time home buyers, despite some easing on Federal Housing Administration underwriting.
FHA lenders are willing to finance borrowers with credit scores under 670 to 680, but they “have to put a lot more money down,” Mezger said. “But most first-time buyers don’t have the cash to put up a larger down payment.”
Flanagan is concerned that the current level of credit availability will not improve anytime soon.
“My belief is that this level now is pretty much the new normal. This is it,” he said, though he acknowledged that his point of view is “extreme.”
But he believes there has been a “paradigm shift” due to recently enacted Dodd Frank Act regulations and stronger enforcement.
The “massive post-crisis mortgage litigation has likely permanently changed lenders perceptions of their ability to collect on residential mortgage debt,” the Bank of America report said.