Home Equity Loans Are Exception to Loosening Credit

By Jann Swanson - MortgageNewsDaily.com

Thursday, January 30, 2014 – 

More banks are easing their underwriting standards as they adapt to changing economic conditions and competition the Office of Comptroller of the Currency (OCC) said today as it released results of its 19th Annual Survey of Credit Underwriting.  Banks are relaxing underwriting for both commercial and retail products, with large banks as a group reporting the highest share of eased standards.  Some loan products, such as home equity loans, instead saw tighter standards.

The survey, a compilation of examiner observations and assessments, included 86 of the largest national banks and federal savings associations and covers the 18-month period ending June 30, 2013.  The survey covered loans totaling $4.5 trillion representing approximately 87 percent of total loans in the national bank and federal savings association system.  Eleven categories of commercial lending were addressed and seven categories of retail products including residential first mortgages, affordable housing, and both conventional and high loan-to-value (LTV) home equity lending.

OCC said its examiners reported banks' increasing risk appetite and greater market liquidity were factors that contributed to easing standards with indirect consumer products, large corporate loans, credit cards, asset-based lending, international lending, and leveraged loans benefiting most.  Despite their conclusions about easing, examiners reported that most banks maintained good or satisfactory adherence to underwriting standards.

Seventy-eight or 91 percent of the surveyed banks originated residential real estate loans and 76 percent reported their residential lending standards were unchanged.  Eleven percent said their standards had eased, up from 10 percent in 2012, while 13 percent said they had tightened requirements compared to 25 percent in the previous survey and 40 percent in 2011.  

Examiners reported that the level of risk in loan portfolios had decreased or remained unchanged at 87 percent of the banks.  OCC notes that although the housing market has experienced a noticeable recovery since the last survey two banks had exited the residential real estate business but none of the remaining banks indicated they planned to do so in the coming year. 

Conventional home equity lending moved a bit in the opposite direction, with loosening of standards reported at 5 percent of banks and tightening at 22 percent while 73 percent reported no change.  However, in 2012 standards were eased by 18 percent and only tightened by 14 percent.

It was high LTV home equity lending which saw the most tightening.  In 2012 standards were eased at 17 percent of institutions; in the most recent survey no institutions reported relaxing lending standards.    Instead they were tightened by 50 percent (down from 66 percent) and unchanged at 50 percent (compared to 17 percent in the previous survey).

"This year's survey showed a progression toward easing underwriting standards as the economic environment stabilizes," said John Lyons, Senior Deputy Comptroller and Chief National Bank Examiner.  He went on to indicate "that as banks ease standards to improve margins and compete for limited loan demand, examiners will continue to monitor underwriting standards to ensure they are prudent and are applied consistently regardless of whether loans are underwritten to hold or distribute."

The survey indicates that 70 percent of examiners responding expect that the overall level of credit risk will either remain unchanged or increase over the next 12 months, a decline from last year's survey, which indicated that 77 percent of examiner responses showed an expectation for no change or an increase in the level of credit risk over the next 12 months. Where examiners expect risk to increase they based their responses on expectations of changes in the state of the economy and continued strong competition.

Underwriting standards, as presented in this report, refer to the terms and conditions under which banks extend or renew credit, such as financial reporting and collateral requirements, repayment programs, terms, pricing, and covenants.  A conclusion that underwriting standards for a particular loan category eased or tightened does not necessarily indicate an adjustment in all of the standards for that particular product but an easing or tightening of the aggregate conditions under which banks extended credit.

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