Mortgage Loan Approval Imbalance Grows

As mortgage problems persist, the growing chasm between those who can have home loans and those who can’t as lenders tighten standards for bad credit loans but not prime rate loans, is increasingly evident.
Meanwhile, fallout from the mortgage market and other housing market woes finds experts second guessing initial forecasts that the economy is safe from turmoil in the housing market.

The Federal Reserve’s April 2007 Senior Loan Officer Survey found recently that while the vast majority of senior loan officers, 85 percent, said credit standards on prime rate mortgages remained unchanged in the last three months.

Meanwhile, more than 56 percent said credit standards on subprime mortgages “tightened somewhat” or “tightened considerably” and 45.5 percent likewise said credit standards on so called bad credit mortgage loans grew considerably or somewhat in the past three months.

The responses came in a special set of questions the quarterly survey put to home mortgage loan officers of domestic banks.

“In order to track developments regarding the categories of residential real estate loans, the April survey asked banks to report separately the changes in standards on and demand for prime rate, nontraditional, and subprime residential mortgage loans,” the survey said.

For the purposes of the survey the home loans were defined this way:

Prime loans: Mortgages made to borrowers that typically had both strong and well-documented credit histories, relatively high credit scores, and a relatively low debt-to-income ratio at the time of origination. The loans include fixed-rate home loans, standard adjustable rate mortgages (ARMs) and hybrid ARMs.

Non-traditional home loans: These are mortgages that include ARMs with multiple payment options, interest-only mortgages, and “Alt-A” products such as mortgages with limited income verification and home mortgages secured by non-owner-occupied properties (second, vacation or investment homes).

Subprime loans: The subprime, or bad credit mortgage category, includes home loans made to borrowers with at least one of these characteristics: weak credit that includes payment delinquencies, chargeoffs, judgments, and/or bankruptcies; reduced repayment capacity as measured by credit scores or debt-to-income ratios; or incomplete credit.

Only 16 banks in the survey wrote subprime mortgages, all 53 wrote prime loans and 44 wrote nontraditional mortgages.

While lenders were tightening standards, making it more difficult to obtain some home loans, demand remained strong for home-buying mortgage loans across all survey categories during the same three months.

• Among prime loans, 68 percent of the officers surveyed believe demand remained the same or was moderately stronger.
• For non-traditional mortgages, 78 percent of the loan officers asked said demand remained the same or was moderately stronger.
• For subprime, or bad credit home loans, nearly 69 percent of loan officers said that demand remained the same or was moderately stronger during the past three months.