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Mortgage Credit Eases as Demand Increases in Q2

The percentage of banks reporting stronger demand for mortgage loans rose in the second quarter from the first, the Federal Reserve reported Monday, with more banks easing lending standards.

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Those results, revealed in the quarterly ""Senior Loan Officers Opinion Survey,"":http://www.federalreserve.gov/boarddocs/snloansurvey/201305/fullreport.pdf are consistent with anecdotal reports that mortgage loans are becoming easier to obtain.

The survey results are reported as a diffusion index; that is, the percentage of respondents saying they are easing lending standards “somewhat” or “considerably” is subtracted from those who report they are tightening standards for a range of different lending products. In the case of ""traditional"" mortgage loans, a net 7.8 percent of banks reported easing lending criteria in the second quarter. In the first quarter, a net 4.6 percent reported easing. Of the banks surveyed, 1.6 percent reported tighter loan standards in the second quarter, and 9.4 percent said they eased somewhat, while 89.1 percent said standards were unchanged.

While the survey results suggest a trend in lending standards, they could be misleading: A bank which has tightened lending standards as much as possible may not necessarily ease them, but cannot tighten any further. (It would be the equivalent of tightening a faucet as far as possible; not tightening further does not mean loosening it.)

In the survey, no banks reported tightening or easing standards for ""non-traditional"" mortgages, and 16.7 percent reported tighter standards for sub-prime loans, though 59 of the 65 banks surveyed said they do not make sub-prime loans. In the survey for the first quarter, 61 of the 71 banks surveyed said they do not make sub-prime loans.

Non-traditional mortgages, the Federal Reserve said, include, but are not limited to, adjustable-rate mortgages with multiple payment options, interest-only mortgages, and ""Alt-A'"" products such as mortgages with limited income verification and mortgages secured by non-owner-occupied properties.

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A net 39.1 percent of banks surveyed said demand for prime mortgages was stronger in the second quarter than in the first. In the first quarter, 19 percent of banks surveyed reported stronger demand from the fourth quarter. Of the banks surveyed for the second quarter, 45.4 percent said demand was either moderately or substantially higher, while 6.3 percent described it as moderately weaker.

As many respondents said demand for non-traditional mortgage loans in the first quarter had strengthened as said demand weakened, and 73.3 percent said demand for non-traditional loans was unchanged from the first quarter to the second.

More banks reported stronger demand in the second quarter for sub-prime loans, with 16.7 percent saying demand has increased and 83.3 percent saying it is unchanged. The sample, however, was only six banks.

A net 3.1 percent of lenders said they had eased standards for home equity lines of credit (HELOCs)--3.1 percent tightening and 6.2 percent easing--while 90.8 percent said standards were unchanged. A net 13.8 percent said demand for HELOCs had weakened (7.7 percent said it was stronger and 21.5 percent weaker), while 70.8 percent reported demand was unchanged.

The survey also asked lenders the likelihood (compared with a year ago) of approving applicants at different credit score levels. Of those surveyed, a net 32.7 percent said they were less likely to approve a borrower with a score of 580, 30.9 percent said they were less likely to approve an applicant with a score of 620, and a net 3.4 percent said they were less likely to approve an applicant with a FICO score of 660.

According to the survey, a net 7.4 percent of banks reported looser standards for credit card loans in the second quarter compared with a net 2.0 percent in the first quarter. A net 12 percent of banks surveyed said demand for credit cards had increased in the second quarter, a reversal from the first quarter, when a net 4.0 percent reported demand for credit cards had weakened.

Demand for commercial real estate (CRE) loans continued to strengthen in the second quarter, with a net 40.3 percent of banks reporting stronger demand (matching the first quarter but down slightly from 44.1 percent in the fourth quarter).

A net 20.9 percent of banks reported easing standards for CRE loans in the second quarter compared with 13.4 percent of banks in the first quarter.

_Hear Mark Lieberman on P.O.T.U.S. (SiriusXM 124) on Friday at 6:20 a.m. Eastern._

About Author: Mark Lieberman

Mark Lieberman is the former Senior Economist at Fox Business Network. He is now Managing Director and Senior Economist at Economics Analytics Research. He can be heard each Friday on The Morning Briefing on POTUS on Sirius-XM Radio 124.
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