Is The Mortgage Squeeze Peaking?

By Bridgette Fanucchi Published Aug 23, 2007 03:08 pm Updated Feb 3, 2015 11:24 am

As the economic fallout from the fractured mortgage market is likely to continue, the squeeze on mortgage consumers may be ready to plateau.

In July, the percentages of domestic lenders tightening credit standards remained relatively unchanged for three types of home loans, according to the Federal Reserve.

Comparing the just released July 2007 Senior Loan Officer Opinion Survey on Bank Lending Practices with April’s survey the Federal Reserve found little change on the levels of credit standard tightening for prime, nontraditional or subprime home loans.

‘In the July survey, banks indicated that they had tightened their lending standards on each of the three mortgage loan categories over the past three months, and the net fractions of banks that reported doing so in each case were roughly the same as in the April survey,’ the report said, based on responses from 53 domestic banks remarking on conditions during a three-month period before the survey.

The July survey found for prime loans, 85.7 percent of lenders left credit standards unchanged as 14.3 percent tightened them somewhat. In April the numbers were 84.9 percent and 15.1 percent respectively.

Prime loans were identified as residential mortgages made to borrowers with relatively strong, well-documented credit histories, high credit scores, and relatively low debt-to-income ratios. The loans included fully amortizing mortgages with a fixed rate, standard adjustable rate mortgages (ARMs), and common hybrid ARMs.

The nontraditional or Alt-A category saw greater change in some levels of tightening as 59.5 percent left credit standards unchanged in the July report, while 35.7 tightened standards somewhat and 4.8 percent tightened them considerably. In the previous survey the numbers were 54.5 percent; 34.1 percent and 11.4 percent.

In the survey, the nontraditional category of residential mortgages includes, ARMs with multiple payment options, interest-only mortgages, mortgages with limited income verification and mortgages secured by non-owner-occupied properties (often second homes).

For subprime loans 43.8 percent of lenders left credit standards unchanged, 31.3 tightened them somewhat and 25 percent tightened credit standards considerably. In the April survey the numbers were 43.8 percent, 25 percent and 31.3 percent.

The Fed defines subprime loans as those made to borrowers with one or more of the following characteristics: weakened credit histories that include payment delinquencies, charge offs, judgments, and/or bankruptcies; reduced repayment capacity as measured by credit scores or debt-to-income ratios; or incomplete credit histories.

The survey also queried banks about demand for residential mortgages and found demand changes mixed.

In July, 38 percent of respondents said demand for prime loans was moderately or substantially weaker, compared to 32.1 percent in the April report.
For nontraditional loans, 28.5 percent of respondents said demand was weaker, compared to 31.8 percent in April.
Among the lenders responding about subprime loans, 43.8 percent said demand had grown weaker, compared to 31.3 percent in April.