FED Data Details Impact of New Mortgage Rules on Mortgage Approvals

August 5, 2014

The Federal Reserve Board recently released its survey of senior bank loan officers. The July 2014 Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS) addressed changes in the standards and terms on, and demand for, bank loans to businesses and households over the second quarter of 2014.

In the July 2014 iteration of the Survey, the Federal Reserve Board included a set of special questions on the effects on the approval rates for home-purchase loans from the Ability-to-Repay and Qualified Mortgage Standards under the Truth in Lending Act (the ATR/QM rule), which came into effect early in 2014. The National Association of Home Builders has provided a comprehensive overview of the new rule. NAHB concluded from its analysis that some creditworthy borrowers could be denied access to affordable mortgages as a result of this rule’s implementation.

According to the results of the SLOOS, a fraction of banks reported that their approvals of mortgage purchase loans from individuals were likely lower because of the ATR/QM rule. However, as Chart 1 shows, the impact of the ATR/QM rule was disproportionately felt on approvals of prime non-conforming loans and on non-traditional loans relative to prime conforming loans; regardless of the credit score associated with the prime conforming loan application. As the Federal Reserve explains, “the majority of banks reported that the new rule has had no effect on the approval rate of prime conforming mortgages, in part because those loans qualify for a safe harbor under the exemption for loans that meet the underwriting criteria of the government-sponsored housing enterprises (GSEs)”.

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However, while in the aggregate, the majority of banks reported that their approval of prime conforming mortgage loan applications were not impacted by the ATR/QM rule, a disproportionate share of other, smaller, banks were more likely to report a decline in approvals of these loan applications stemming from the ATR/QM rule. As the data below indicates, a plurality of smaller banks, 50%, reported that the ATR/QM rule likely lowered their approval of prime conforming loans for borrowers with a FICO score less than 680 and 44% reported that the ATR/QM rule likely lowered their approvals of prime conforming loans for borrowers with a FICO score greater than or equal to 680. This compares to 22% and 19% respectively for large banks. Moreover, the result that a majority of all banks reported that the ATR/QM rule likely lowered their approvals of prime non-conforming and non-traditional loans, as indicated in Chart 1, reflected the impact of the rule on the approvals of these mortgage applications by smaller banks, as shown in Chart 2.

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A Wonderful Life??? 4th Qtr Mortgage Standards Ease at Big Banks, Tighten at Regional Ones

February 6, 2014

The Federal Reserve Board recently released its survey of senior bank loan officers. The January 2014 Senior Loan Officer Opinion Survey on Bank Lending Practices addressed changes in the standards and terms on, and demand for, bank loans to businesses and households over the final quarter of 2013.

According to the survey results, lending standards eased for most consumer loans. However, lending standards for primary residential mortgages reportedly tightened. As Figure 1 depicts, a net fraction of 14.9% of loan officers reported that auto lending had eased. Meanwhile, a net fraction of 7.0% reported that lending standards on both credit cards and other consumer loan products had also eased over the quarter. In contrast, a net fraction of 1.4% of senior bank officers reported that standards for prime residential mortgages had tightened over the fourth quarter of 2013. The “net fraction” reflects the difference between the shares of senior loan officers reporting that their bank eased standards over the past quarter and answering that their bank tightened its lending standards.

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A decomposition of the survey results indicates that the tightening of lending standards on prime residential mortgages took place at “other banks”, while lending standards at large banks eased over the quarter. According to the survey, large banks refer to large, national banks while other banks encompass large but regional banks. Figure 2 shows that a net fraction of 14.3% of senior loan officers said that lending standards on prime residential mortgages tightened over the previous 3 months, no “other banks” survey respondents reported that their bank’s lending standards eased. In contrast, a net fraction of 11.1% of senior bank officers at large banks stated that lending standards on prime residential mortgages had eased over the past quarter, 16.7% of officers reported that their bank eased its standards while 5.6% of officers said that their bank tightened standards.

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