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Banks See Value in Owning Mortgages.Time to Jumpstart Non-Agency Lending

by devteam February 4th, 2011 | Share

The Federal Reserve Bank periodically conducts a survey amongrnsenior loan officers at major banks on current lending practices. There arerngenerally around 70 U.S. and foreign banks with U.S. branches that respond tornthe survey, and as responses are opinions and thus more anecdotal than quantitativernand the universe of respondents is small, not all results can be reported numerically.  </p

The January survey reported that about 15 percent ofrnrespondents said standards for nontraditional mortgages were tightened by theirrninstitution, the second month in a row that small increases were noted.  Standards for prime closed-end residentialrnreal estate loans and home equity loans were little changed, on balance, forrnthe entire quarter.</p

According to a Federal Reserve statistical release on assetsrnand liabilities of commercial banks, aggregate holdings of closed-endrnresidential mortgages increased steadily in the second half of 2010.  Several “special questions” are askedrnin each survey, and for the January report senior loan officers were asked tornassess the contribution of various possible factors to this increase.</p

About 45 percent of respondents indicated that their banksrnhad experienced such growth and the majority noted the “relative attractivenessrnof the risk-adjusted returns on these loans compared with assets” andrnreported a willingness to expand their balance sheets accordinglyAbout one-third reported they had originatedrna larger volume of loans that were ineligible for sale to the GSEs or FHA.  A smaller number attributed the growth tornreductions in charge-offs or pay downs or to a slowdown in processing the loansrnout to the secondary market.  Only twornbanks attributed any part of the portfolio growth to loan repurchases.   About 35 percent of respondents on net saidrnthey expected that their bank’s holdings of such loans would continue to increase.</p

“Approve/ineligible loans are generally backed by borrowers who have demonstrated the willingness and ability to stay current on their debts,rn but for one reason or another they just don’t qualify for an agency loan” said MND’s managing editor Adam Quinones. He added, “This type of loan paper would be a great source of collateral to jumpstart the non-agency secondary mortgage market. We suggested this might be a good idea last year when Fannie Mae announced their Loan Quality Initiative“.</p

A small majority of banks reported they had tightened termsrnor lowered credit lines on existing consumer credit card accounts while arnmajority also reported easing standards for approving new credit cardrnapplications.  </p

The January survey indicates that most banks, andrnparticularly the large ones, have eased their standards and terms on commercialrnand industry (C&I) loans, especially to large and middle market firms butrnhave left commercial real estate (CRE) loans largely unchanged.  Loosening terms were generally the result ofrneither a more stable economic outlook or increased competition.  About a quarter of respondents also citedrnreductions in defaults by borrowers in the public debt market, increased tolerancernfor risk, and industry-specific changes.</p

The demand for C&I loans was more widespread than in thernprevious survey with about 30 percent of banks on net reporting greater demandrnfor credit from large and middle-market firms and 5 percent from smallrnfirms.  There was also an increase inrninquiries for new and increased credit lines.</p

A set of special questions, asked once each year, was about expectationsrnfor delinquencies and charge offs in major loan categories.  Responses were “significantly morernupbeat” than in other recent years. rnModerate to large net fractions of banks reported that they expected an improvementrnin delinquencies and charges-offs this year in every major loan category.  Loan officers were, however, least likely tornexpect improvement in the quality of their residential real estate loans.  About 20 percent of the banks, on net, expectrnimprovements in non-traditional closed-end loans and about 35 percent expectrnimprovements in home equity lines. rnAlmost 40 percent expected improvement in prime closed-end loans.  Large banks were more likely than small banksrnto expect improvement in their residential portfolios.

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About the Author

devteam

Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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