Banks Still Reluctant to Ease Mortgage Lending Terms: Fed Survey

NEW YORK ( TheStreet) -- Banks are ramping up the marketing of home-purchase loans to borrowers as refinancing volumes plummet, but there are still few signs that they are ready to ease lending standards materially.

According to the latest Senior Loan Officer Survey conducted by the Federal Reserve, "a modest net fraction" of large banks said they had eased standards for prime residential mortgages over the past three months, while small banks had left standards unchanged. There was no significant change in standards for sub-prime and nontraditional mortgages.

The survey, sent out following the 100-basis-point rise in mortgage rates in May, asked respondents special questions about the impact of rising rates on lending.

Banks reported having experienced weaker demand for prime and nontraditional mortgages in the past three months. A modest net fraction of banks reported that the composition of new mortgage applications, including applications for both home purchase loans and mortgage refinancing, shifted away from fixed-rate mortgages and toward adjustable-rate mortgages since the spring.

More than 90% of the respondents reported "substantially lower" refinancing applications.

In response to the drop in refinancing volumes, many banks reported having reduced the processing time for home-purchase loan applications and said they had increased their marketing of home purchase loans.

Still, few reported reducing origination and processing fees or minimum downpayment requirements and FICO credit scores for approving home loans. Banks remain extremely tightfisted in approving applications for mortgages eligible for purchased by the government-sponsored enterprises Fannie Mae ( FNMA) and Freddie Mac ( FMCC). Banks said they were less willing to approve loans to borrowers with combinations of FICO scores between 620 and 720 and down payments between 10% and 20%.

Banks saw mortgage production revenues and profitability crater in the third quarter, with JPMorgan Chase ( JPM) reporting a small loss and Wells Fargo ( WFC) seeing a 43% drop in mortgage production income.

The decline in refinancing volumes, which have been exceptionally high in the last few years due to low interest rates, is unlikely to be offset by revenue from the purchase market. A modest fraction of lenders said they expect purchase applications to increase.

Some industry observers have suggested that banks faced with declining refinancing activity might be more willing to relax standards and compete for business but so far it looks like borrowers are still waiting for banks to open the spigot.

-- Written by Shanthi Bharatwaj New York.

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