Banks, GSEs Crossing Signals?
The Federal Reserve's July survey of senior loan officers, released Monday afternoon, unveiled some telling trends for the mortgage markets: for one thing, credit is still in a tightening cycle, underscoring the point that while homes may be getting more affordable, access to credit is also getting more expensive. But far more telling is an potential disconnect between the expectations of mortgage bankers and an expected shift in strategy at both Fannie Mae (FNM) and Freddie Mac (FRE) as credit costs continue to mount, a disparity noticed by American Banker's Steven Sloan as well. The Fed's survey found that 30 percent of loan officers said their bank had securitized with or sold so-called- "jumbo conforming" mortgages to the GSEs in the past three months -- and that a full 45 percent expected their bank to do so over the next six months. Jumbo conforming mortgages refer to loans above current $417,00 conformning limit that otherwise meet the GSEs' underwriting criteria; legislation enacted earlier this year gave Fannie and Freddie the temporary authority to purchase loans up to a $729,500 limit in certain high-cost areas through the end of this year. A recently-signed housing relief bill makes the jumbo conforming market a permanent fixture for the GSEs, but at a lower $625,000 ceiling, starting next year. While bankers are clearly expecting to send more jumbos Fannie and Freddie's way, it's equally clear that the GSEs at this point are likely to reserve their purchasing power, as they take steps to cover for credit losses inherent in their existing books of business; executives at Fannie Mae all but acknowledged as much in a recent conference call with analysts, saying the GSE would take a "day by day" approach towards go-forward purchase volume. While the question only addresses the nascnent "jumbo conforming" market, it's a telling window into current market sentiment; conforming mortgages and those insured by the FHA have become essentially the market in mortgage banking. Which is to say the "originate and sell" model is alive and well; it's just who's buying that has changed, relative to the private-party market for mortgages that has been decimated by the current crisis. Tighter conditions Not all that surprisingly, the Fed survey found that large majorities of respondents reported having tightened their lending standards on prime, nontraditional, and subprime residential mortgages over the previous three months. About 75 percent of loan officers—up from about 60 percent in the previous survey—indicated that they had tightened their lending standards on prime mortgages. Even higher percentages of bank lenders indicated credit tightening in the non-traditional and non-prime lending segments. Thirty percent of loan officers surveyed say that they've experienced weaker demand for prime residential mortgage loans over the past three months, and about 45 percent—up from roughly 30 percent in the April survey—saw weaker demand for nontraditional mortgage loans over the same period, the Fed said. The dropoff in demand for prime loans should be telling. Outside of mortgages, banks are tightening the leash on consumer credit, in general; the survey found that two-third of domestic banks tightened lending terms between April and July for credit card and other consumer credit products. Banks are also raising minimum credit scores and lowering credit limits on credit-card accounts, and an increasing number of banks are exhibiting what the Fed called a "diminished willingness to make consumer installment loans." In other words: the picture for consumer spending just got a whole bunch darker, if bankers have anything to say about it. Disclosure: The author was long FRE and held no positions in FNM when this story was published; indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.