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Banks report tightened lending standards for nearly all residential mortgages: Fed survey

Banks expect mortgage demand to strengthen across all loan categories in 2024, citing expected rate cuts

Banks reported having tightened lending standards across almost all categories of residential real estate loans over the fourth quarter of 2023 amid an elevated interest rate environment.

There’s some optimism, however. With the central bank expected to cut interest rates this year, banks reported that loan demand should strengthen across residential loan categories in 2024, according to the Fed’s quarterly senior loan officer opinion survey (SLOOS) released on Monday. 

The survey showed that nearly 15% net share of banks reported having tightened standards on non-qualified-mortgage (QM) jumbo residential loans (14.6%) and QM jumbo loans (15.4%) in the fourth quarter.

A moderate net share of banks tightened standards on home equity line of credits, or HELOCs (13.7%), non-QM non-jumbo (12.5%), subprime (9.1%), and QM non-jumbo, non-government-sponsored enterprise (non-GSE) eligible loans (11.5%). 

In contrast, only modest net shares of banks reported tightening standards on GSE-eligible (5.6%) and government loans (3.8%), for which standards remained basically unchanged. 

A 50%-plus net share of all U.S. banks said they saw weaker demand for all types of residential real estate loans except for government (46.2%) and subprime mortgage loans (41.6%).

The seven categories of residential home-purchase loans that banks are asked to consider are GSE eligible, government, QM non-jumbo non-GSE-eligible, QM jumbo, non-QM jumbo, non-QM non-jumbo, and subprime mortgage loans. 

The survey showed that a net 25.5% of banks reported weaker demand for HELOCs.

Rising home prices have pushed tappable home equity near its 2022 peak, but high interest rates have made homeowners reluctant to extract that wealth.

Mortgage holders withdrew a mere 0.41% of tappable equity in Q3, about 55% below the average withdrawal rate seen in the 12 years leading up to the Federal Reserve’s most recent tightening cycle, according to a recent ICE Mortgage Technology mortgage monitor report.

As for their expectations for 2024, banks expect loan demand to strengthen across all loan categories, citing an expected decline in interest rates.

Regarding lending standards, the majority of the banks reported that they expect standards to remain basically unchanged over 2024 for GSE-eligible residential mortgages and nonconforming jumbo mortgages.

Additionally, moderate net shares of banks reported expecting credit quality – as measured by delinquencies and charge-offs – to deteriorate for GSE-eligible residential mortgages and nonconforming jumbo residential mortgages. 

Responses were received from 64 domestic banks and 20 U.S. branches and agencies of foreign banks. Respondent banks received the survey on December 18, 2023, and responses were due by January 9, 2024. The survey asks officers about topics such as changes in lending terms as well as household demand for loans.

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