In our last post, titled Credit Standards Ease…Consumers Still Shy, we focused on the state of supply and demand for consumer loans using the Federal Reserve Board’s Senior Loan Officer Survey data. The survey also tracks similar data for residential mortgage loans. We have had a chance to look at the latest mortgage results and it suggests that while the supply of credit remains mostly unchanged, consumer demand has turned net-positive for the first time since mid-2010.
Supply is illustrated by determining the restrictiveness of participant underwriting standards for prime, nontraditional, and subprime residential mortgage loan products. To make this determination, the Fed asks participants whether the institution’s underwriting standards have tightened or eased over the three months that have passed since the prior survey effort.
The chart below showcases the net percentage of participant responses to the question of tightening standards. Net percentage equals the percentage of participants that reported having tightened standards minus the percentage of banks that reported having eased standards. A negative number means the bulk of survey respondents are making it easier to obtain loans by loosening underwriting standards. A positive number means the bulk of survey respondents are making it harder to obtain loans. Note that you can enlarge the chart by clicking on the image.
As the chart illustrates, underwriting standards for both prime and nontraditional residential mortgage products remain relatively unchanged. The net percentage for both products is actually 0, which means neither tightening nor easing – on average. Subprime products essentially disappeared in early 2009. Note that individual product types were not reported until early 2007.
So that you are clear on the differences in the measured product types, here is the Fed’s description of each:
- The prime category of residential mortgages includes loans made to borrowers that typically had relatively strong, well-documented credit histories, relatively high credit scores, and relatively low debt-to-income ratios at the time of origination.
- The nontraditional category of residential mortgages includes 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.
- The subprime category of residential mortgages typically includes loans made to borrowers that displayed one or more of the following characteristics at the time of origination: weakened credit histories that include payment delinquencies, chargeoffs, judgments, and/or bankruptcies; reduced repayment capacity as measured by credit scores or debt-to-income ratios; or incomplete credit histories.
Demand is illustrated by determining the level of mortgage requests for the same selection of mortgage products included in the supply question. To make this determination, the Fed asks participants to indicate how demand from individuals for residential mortgage loans has changed over the prior three months – apart from normal seasonal variations. Response options range from Substantially Stronger to Substantially Weaker.
The chart below showcases the net percentage of participant responses to the question of demand. Net percentage equals the percentage of participants that reported experiencing stronger demand minus the percentage of participants that reported weaker demand. A positive number means that the bulk of survey respondents are experiencing increases in demand. A negative number means the bulk of survey respondents are experiencing declines in demand. Note that you can enlarge the chart by clicking on the image.
As the chart indicates, demand for both prime and nontraditional residential products appears to be increasing. This is the first foray into positive territory for prime loans since mid-2003, and the first ever positive calculation for nontraditional loans. Note that as in the Supply chart, individual product types were not reported until early 2007.
What This Means for Credit Unions
As we referenced in our Credit Standards post, perhaps this is the beginning of a greater thaw in the broader consumer loan market – including the market for mortgage loans. Though credit unions have seen growth in mortgage loans, much has been growth relative to existing credit union mortgage portfolios. There is still a fair amount of untapped potential for credit unions, especially if consumer demand continues expand.
Unlike the consumer market, where easing standards has been more the rule than the exception over the last few months, it may be possible to gain an edge over bank competition by pushing a little harder, now, to grab member mortgage business. Check your standards, review your portfolio procedures, and certainly get the word out to the world that credit unions are a great place to find residential mortgage solutions!