The call-out here isn’t huge but it is worth a highlight as it relates to housing finance and the credit availability impacts from QM’s higher regulatory burden.
The 2Q14 Fed Senior Loan Officer Survey released earlier this week showed residential mortgage activity getting squeezed from both sides.
While demand across all loan types remained under pressure in the latest survey, the tightening of credit standards across non-traditional and subprime loan categories sat as the largest and most remarkable change.
The net percentage of banks tightening standards for Non-traditional and Subprime residential real estate loans increased to 24.3% and 42.9%, respectively, over the three month period ending in April.
Whether the Jan 10th implementation of the new Qualified Mortgage standards is singularly responsible for the discrete tightening of credit standards in the latest survey is open to some speculation.
However, given that the credit tightening was isolated to the loan types most likely to be affected by the regulations (note that the net percentage of banks tightening standards for prime borrowers showed no increase sequentially) and that it occurred exactly concomitant to QMs implementation is highly suggestive.
While lender caution may be more pronounced in the early going as institutions ‘get a feel’ for the new regulation and its level of policing, we continue to think the more stringent lending guidelines will serve as an ongoing drag to housing demand over the intermediate term.
*Reference: Below is the categorization of loan types used by the Fed for the Loan Officer Survey
- 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. This would include fully amortizing loans that have a fixed rate, a standard adjustable rate, or a common hybrid adjustable rate—those for which the interest rate is initially fixed for a multi-year period and subsequently adjusts more frequently.
- The nontraditional category of residential mortgages includes, but is 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.
- 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
Christian B. Drake