Lenders are no more willing now to make a home loan backed by Fannie Mae or Freddie Mac than they were six years ago, according to a Federal Reserve Board survey released Monday.
In the Federal Reserve's Senior Loan Officer Opinion Survey, banks were asked to compare their willingness to originate a 30-year fixed-rate mortgage — guaranteed by one of the two government-sponsored enterprises — today with their willingness in 2006, two years before Fannie and Freddie were seized by the government.
A "large majority of banks" — roughly 60% — said they were "much less likely" to originate a GSE-backed mortgage to a potential borrower with a FICO score of 620 and a 10% down payment than they were before the crisis, the Fed said. Not a single institution said it was even "somewhat" more likely to lend to that category now compared to six years earlier.
A higher down payment of 20% raised banks' interest in selling loans to the GSEs, but did not ease their reluctance completely.
The Fed's survey showed an array of reasons for banks' reservations about the market, including their not wanting too much exposure to residential real estate; effects of legislative changes, supervisory actions and new accounting standards; higher servicing costs for delinquent mortgages; and the difficulty certain borrowers face trying to obtain second liens.
Banks also said they were less likely to originate a GSE-backed loan to a potential borrower with a FICO score of 680 regardless of the size of the down payment. Lenders' opinions differed only slightly from 2006 about utilizing the GSEs for borrowers with a FICO score above 720 with a 10% down payment. Roughly 71% of all banks said their willingness to lend in that category was about the same with only three banks saying they would be "somewhat more likely" or "much more likely" to originate a loan under those terms.
Their reticence stayed true even when such borrowers put down 20% payment on their home. Roughly 79% of lenders said their willingness to lend with those terms was exactly the same as it was in 2006.
"Most banks cited borrowers having higher costs for, or greater difficulty in obtaining, mortgage insurance coverage as an important factor contributing to the reduced likelihood of originating GSE-eligible mortgage loans," according to the Fed's survey.
The most prominent factor, however, cited by lenders was the risk of "putbacks" of delinquent Fannie and Freddie mortgages. Close to 60% of all banks — including 16 large banks — surveyed said that factor was either "very important" or "the most important."
Bankers appeared to be just as worried about the impact of legislative changes or supervisory actions by regulators on the mortgage market. A minority of lenders — 30% — said new government policies were not an important factor in their decision-making.
Other lenders, including a majority of large banks, cited a less favorable or more uncertain outlook for home prices or the economy as a whole as their reason to shy away from the GSE market.
Looking ahead, bankers said they expect to largely keep their holdings of residential real estate assets over the next year. About 43% of the respondents said they expect to increase their holdings "somewhat," while only two banks said they would raise their exposure "substantially."
Bankers offered a number of reasons impacting their ability to originate or buy additional residential real estate loans. Those included challenges to hiring sufficient staff at the bank, to completing timely and accurate underwriting, and to their capacity to process loan applications.
When it came to the government's newly adjusted Home Affordable Refinance Program, commonly known as HARP 2.0, one-third of banks said they were "actively soliciting applications" by borrowers and were satisfying more demand as it came in. But on the flip side, nearly half said their banks had "very little participation" in the refinance program.
The Fed also asked banks about their willingness or ability to refinance underwater loans outside of the refinance program for those borrowers who have been current on their mortgage for at least one year. Only six banks out of 53 surveyed said they were actively seeking applications for refinancings not associated with the program, while more than half said they were "doing very little refinancing of underwater mortgage loans held in its portfolio outside of HARP 2.0," according to the survey.
As they had done in the last two surveys in January and October, the Fed also asked banks about their lending to firms with exposures to Europe.
Banks reported having tightened their standards on loans to European banks, and a small number said they also applied similar criteria on loans to nonfinancial firms that have operations in the U.S. but significant exposure to European economies.
Roughly 35% of banks said they either tightened their standards to European banks "considerably" or "somewhat," while about 61% said standards remained unchanged.
Roughly two-thirds of U.S. banks noted an increase in business as a result of decreased competition from European banks — a much larger contingent than in January.