There’s a bit of irony in the fact that mortgage rates have been trending downward for the past ten years yet so have underwriting standards. Lower mortgage rates tend to bring customers to the lenders so why on earth would you loosen lending guidelines?
One possible explanation is the growing market share of mortgage brokers who bring in the business to the lenders. Over 70% of mortgage originations today start with a mortgage broker. This in-and-of-itself isn’t necessarily a bad thing. Upper management has placed emphasis on speed and cost but seems to have had little concerns about future risk.
Here’s the results of a recent Federal Reserve survey:
The Federal Reserve released their The April 2006 Senior Loan Officer Opinion Survey on Bank Lending Practices [FRB] last month [hat tip to Mish] and the general pattern showed that lenders were continuing to relax their underwriting standards. In fact, most respondents to the survey reported easing of their lending standards giving more aggressive competition as a primary motivator.
It will be interesting to see if the July report shows the same trend. We are already starting to see increased sensitivity to underwriting on a first hand basis in our appraisal practice. Mortgage brokers have been hiring us after lenders have been rejecting the ususal appraisal fodder they have been submitting for the past five years.