Smaller Banks Tighten Underwriting Standards on Loans

November 9 2010 (Shirley Allen)
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According to the October 2010 Senior Loan Officer Opinion Survey on Bank Lending Practices from the Federal Reserve, smaller banks and mortgage lenders reported tighter lending standards on mortgage loans over the previous three months which marks a reversal from a slight easing that had been reported in the previous report.

Additionally, more banks reported that underwriting standards for home equity lines of credit had tightened, likely because house values continue to be under pressure.

Although both large and small banks reported the net tightening in underwriting on non-traditional loans such as sub-prime and Alt-A loans, the tightening of underwriting on prime mortgage loans was largely tied to smaller banking institutions.

Less than half of the banks and lenders that responded to the survey reported that they were making sub-prime and Alt-A loans during the quarter, which has been the trend since the start of the mortgage crisis.

Many of the banks and lenders reported weaker demand for both prime and nontraditional mortgages used to purchase homes.
Weakening loan demand for home purchases would not be good news for the flagging housing market, or for loan officers and mortgage brokers, who have relied on refinance applications to stay afloat. Unfortunately, even with historic low rates, demand for refinancing loans has been slowing too.

Just under $1 trillion in residential loan origination volume is predicted next year.

Tags: federal reserve, mortgage loans, underwriting standards, home equity lines of credit, home values, banks, lenders, loan officers, mortgage brokers, refinancing, loans