Lenders Have Their Say
By David Givens
06/28/01 12:00 PM ET
One might expect that with
faltering payroll growth,
soaring jobless claims, and a
rising unemployment rate,
bankers would have grown
more cautious in making
mortgage loans. However,
mortgage lending has
historically been one of the
safest investments banks can
make; and as the Federal
Reserve's May Senior Loan Officer Opinion Survey indicates, while
standards for commercial and industrial (C&I) and all other types of
consumer loans have tightened, standards for mortgage lending have
remained basically unchanged this year.
The Fed's May 2001 loan officer survey shows a widening divergence
between standards in mortgage lending and in all other types of
lending. Tightening and easing trends in these two areas have
traditionally moved together. However, that correlation is breaking
down; while a net 50% of banks are tightening standards for C&I
loans, and nearly a fifth, on net, are tightening standards on credit
card and other types of consumer loans, banks have left terms on
mortgage lending largely unchanged (see chart above). What accounts
for this divergence?
To understand why bankers might not want to turn off the spigot to
homebuyers the way they have to other borrowers, several points are
worth considering. First, the structure of the mortgage lending market
has changed substantially over the last decade. A much higher
percentage of mortgage loans are now securitized and sold to
investors rather than being held by the originator. Thus the business of
making mortgage loans has become less risky to the lender.
Second, the decline in mortgage rates this year has fueled a surge in
mortgage applications. Banks, no matter how risk-averse, are eager to
grab their share of this homebuying binge. With mortgage lending
considerably more competitive now than it was a decade ago, bankers
are reluctant to put up any barriers that might send a potential
borrower out the door.
Third, mortgage lending has traditionally been safer than other types
of consumer and C&I loans. Credit card charge-offs have spiked over
the last twelve months. In the wake of deteriorating corporate credit
quality, banks began tightening C&I lending standards as far back as
1998. C&I charge off rates have been on the rise for two years, and a
number of syndicated loans--loans to corporate borrowers, which are
so large they have to be underwritten by multiple banks--have gone
bad in the last year. The bad luck banks have had with C&I borrowers
is analogous to the bad luck that has hammered traders on Wall Street.
Like traders betting big on the dot com revolution, banks bet on a few
major corporations and lost. Borrowers burned through cash, their
profits failed to materialize, and the investors lost their money.
Betting on households making their mortgage payments is a safer
alternative. Delinquency rates peaked at 3% for mortgages during the
1990-91 recession, compared to 5.5% for credit card loans and 6%
for C&I loans. Mortgage loans continue to show the lowest
delinquency and charge-off rates of all consumer and C&I loans. This
is to be expected assuming that, among all their debts, consumers are
most reluctant to default on their home loan, and considering that the
barrier to even obtaining a home loan is much higher than the barriers
to getting a credit card.
A fourth factor boosting mortgage lending is strong house-price
appreciation. House-price growth has decelerated a bit over the last
three quarters,, but is expected to continue outpacing inflation over the
next decade. In contrast, during the last recession, house price growth
plummeted to zero at the same time inflation accelerated to 6% (see
chart). Banks, as a result, tightened up mortgage lending, showing an
understandable reticence at the prospect of accepting a depreciating
asset as collateral. Now, however, with healthy house-price growth,
banks stand a better chance of recouping their losses should the
borrower default.
Finally, while the labor market has clearly deteriorated in the last
twelve months, there is reason to believe that the layoffs and surging
jobless claims, which have grabbed headlines recently, are not
representative of the average worker's situation. Job losses have been
concentrated in manufacturing and high-tech industries, leaving the
incomes of most Americans untouched by the current slowdown.
Indeed, still-strong wage growth, and the belief that aggressive
monetary and fiscal policy will restore the economy's health have
helped fuel a very recent rebound in consumer confidence. Given
these factors, don't expect banks to tighten up mortgage lending
standards any time soon.
Got poots???? |
