OCC: Nearly half of banks still tightening mortgage standards
Roughly 40% of the 48 banks surveyed by the Office of Comptroller of the Currency tightened underwriting standards for mortgages written in the last year. The survey covered $4.2 trillion in loans, including small business loans, residential and commercial mortgages, credit cards and others that banks wrote in the 12 months ending Feb. 28. The OCC said, overall, banks began to ease underwriting standards. "In certain products, banks are once again easing standards in response to competition, an improvement in credit market liquidity, and a desire for more market share," the OCC said. Not so for mortgages. The OCC examiners looked at collateral requirements, pricing and debt service requirements. Of the 48 banks surveyed, only four showed they were easing standards for real estate loans. More than half kept their standards unchanged. For conventional home-equity loans, 36% of the banks offering this product tightened their standards. More lenders continued to decline home equity lending to borrowers with high loan-to-value ratios. Only two of the six banks reporting on these riskier products still offer them. One plans to stop the business in the next 12 months. "Examiners report that underwriting standards remain conservative in response to poor portfolio performance resulting from more liberal underwriting standards in previous years, particularly 2005 through 2007 originations, and continuing economic weakness," the OCC said. Commentators at the American Securitization Forum annual meeting in Washington, D.C., this week said private-label secondary markets fund much of the consumer loans today – except for mortgages. Existing home sales plummeted again in May, dropping 15% from one year ago, according to the National Association of Realtors. The trade group's Chief Economist Lawrence Yun blamed the still struggling housing market on the bank's unwillingness to lend. "Even with recent economic softness, this is a disappointing performance with home sales being held back by overly restrictive loan underwriting standards," Yun said. "There’s been a pendulum swing from very loose standards which led to the housing boom to unnecessarily restrictive practices as an overreaction to the housing correction — this overreaction is clearly holding back the recovery." Regulatory issues remain unresolved, including upcoming risk-retention rules, servicing standards, and the fate of the government-sponsored enterprises. Until then, liquidity will have a hard time flowing into the market and underwriting standards will remain tight to mitigate the risk. "The greatest credit risk in banks is the ongoing impact of real estate values due to the significant volume of commercial real estate, residential real estate, and home equity loans in national banks’ portfolios," the OCC said. "Banks with significant credit card portfolios have experienced significant credit risk due to the impact of the weak economy and high unemployment rate." Write to Jon Prior. Follow him on Twitter @JonAPrior.