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

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

The January survey reported that about 15 percent of respondents said standards for nontraditional mortgages were tightened by their institution, the second month in a row that small increases were noted.  Standards for prime closed-end residential real estate loans and home equity loans were little changed, on balance, for the entire quarter.

According to a Federal Reserve statistical release on assets and liabilities of commercial banks, aggregate holdings of closed-end residential mortgages increased steadily in the second half of 2010.  Several "special questions" are asked in each survey, and for the January report senior loan officers were asked to assess the contribution of various possible factors to this increase.

About 45 percent of respondents indicated that their banks had experienced such growth and the majority noted the "relative attractiveness of the risk-adjusted returns on these loans compared with assets" and reported a willingness to expand their balance sheets accordingly.  About one-third reported they had originated a larger volume of loans that were ineligible for sale to the GSEs or FHA.  A smaller number attributed the growth to reductions in charge-offs or pay downs or to a slowdown in processing the loans out to the secondary market.  Only two banks attributed any part of the portfolio growth to loan repurchases.   About 35 percent of respondents on net said they expected that their bank's holdings of such loans would continue to increase.

"Approve/ineligible loans are generally backed by borrowers who have demonstrated the willingness and ability to stay current on their debts, 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".

A small majority of banks reported they had tightened terms or lowered credit lines on existing consumer credit card accounts while a majority also reported easing standards for approving new credit card applications. 

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

The demand for C&I loans was more widespread than in the previous survey with about 30 percent of banks on net reporting greater demand for credit from large and middle-market firms and 5 percent from small firms.  There was also an increase in inquiries for new and increased credit lines.

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