Wednesday, November 6, 2013

What does the Fed's bank survey tell us about mortgage origination?

The Fed recently released the latest Senior Loan Officer Survey data. The results are important because they allow us to get a glimpse of how the increase in long-term rates impacted lender and borrower behavior. Here are a couple of conclusions:

1. Higher rates did not have a negative impact on banks' underwriting standards. In fact some banks reported loosening their requirements.
WSJ: - Nearly 80% of banks said their credit standards for mortgages remained basically unchanged from July through September ... about 15% of banks said their standards for mortgages have eased somewhat.
2. Demand for mortgage loans has dropped quite sharply as rates increased.
WSJ: - More than 40% of banks said they saw a lower volume of mortgage applications since the spring, prior to the increase in mortgage rates. About a third of banks said demand was about the same or stronger.

Fewer home owners refinanced their mortgages in the period due to rising interest rates, the banks said. More than 90% of banks have received moderately to substantially lower volumes of applications compared with the spring.
The chart below shows the two trends.

Source: Federal Reserve Bank of St. Louis (domestic banks only)

It is important to note that the bulk of the drop in loan demand has been in refinancing rather than home purchases. That means higher rates did not have a substantial impact on the overall credit growth.
Barclays Research: - A net 17% of banks reported that volume of applications for purchases had declined, while 93% reported that application volumes for mortgage refinancing were moderately or substantially lower than in the second quarter of this year. These data are consistent with trends in Mortgage Bankers Association applications for purchases and refinancing, which reveal a much sharper drop in applications for refinance than for purchase.
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