Underwriting Standards May Have Loosened Too Quickly -BB&T CEO

BB&T announced better than expectedrnfinancial results on Thursday, with second quarter earnings coming inrnat 0.77 per share, .03 higher than estimates, and revenues of $2.5rnbillion. A press release from the bank said these were the bestrnquarterly results ever and credited the bank’s best credit qualityrnlevels in five years.</p

In an interview with CNBC’s Andrew RossrnSorkin following the release BB&T Chairman and CEO Kelly Kingrnsaid loan underwriting standards may have loosened too quickly sincernthe 2008 crash. Going into the Great Recession, he said,rnunderwriting had become too liberal and then it tightenedrndramatically after the crisis hit. Now it is about halfway back tornthe “too liberal” standards. </p

“I have been doing this for 41 years now,” King said.rn”Usually, we go in a 10-year cycle of memories from the badrntimes to forget all the bad loans and start making bad loans again.”rn He said he was a little concerned that underwriting standards havernbeen “coming back faster” than he had expected. </p

King also said that the steeper yield curve is not having arnmaterial impact on his bank in the short run because the short end isrnstill very low. It is impacting BB&T.’s mortgage business, hernsaid, because as the rates rise the refinancing business is goingrndown. “But as it begins to steepen on a permanent basis you willrnsee all rates rise and that will be good for us because we are assetrnsensitive. That means we have more assets to price up as the ratesrngo up than liabilities.” Right now, he added, the affect is sortrnof muted except for mortgages and in the long run it will be positivernfor BB&T.</p

Kings remarks about lending standards drew quick reaction fromrnseveral MND readers. Constantine Floropoulos of Quontic Bank said,rn”I couldn’t disagree more that underwriting standardsrnare getting too loose. In no way, shape, or form are we moving backrntoward the underwriting standards considered to be a key component inrnthe melt-down.  When worthy homeowners (families with children,rnsmall business owners, entrepreneurs, and veterans to say a few)rncan’t get a loan to reduce their interest rate from 7% to 3.5% evenrnwith perfect credit, it’s easier to make the case that guidelines arernactually too tight.  I’m not sure where Mr. King thinks we arernwith respect to the 10yr cycles he mentioned, but we’re roughly 7rnyears away from the apex of loose underwriting and most originatorsrnwould agree we have yet to make a meaningful movement back in thernother direction. </p

MattrnHodges, Sales Manager at Presidential Mortgage Group concurred, sayingrn”I find it amazing that BB&T considersrncurrent lending standards too loose “half way back to where we werernbefore”.  Has Mr. King not seen the drastic changes in thernindustry over the past 6 years?  Freddie Mac used to allowrnunlimited debt to income ratios 6 years ago.  If you havernperfect file, you might get to 50% now, but more likely a maximum ofrn45%.  Has Mr. King not heard about the upcoming QualifiedrnMortgage (QM) changes that most lenders will roll out this Fall,rncapping debt to income at 43%?  Is he not aware of FHA’srnchange to MIP costs and their permanence for the life of the loan? rnLenders are so concerned about buyback fears and fraud that thernguidelines are extremely tight.</p<prnrnrnrnrnrnrnrnrnrnrn

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