Senior Loan Officers Indicate Tepid Response to HARP 2.0

Respondents to the April Federal Reserve Senior Lending Officers Survey were asked a series of special questions about residential mortgage lending practices at their institutions.  These questions, which were in addition to the questions customarily asked on the quarterly survey regarding loan demand and bank standards, covered the banks’ responses to the revised Home Affordable Refinance Program (HARP 2.0), refinancing underwater mortgages outside of HARP 2.0, changes anticipated in the institutions’ residential real estate holdings over the next year, and about factors affecting the bank’s ability to originate residential loans, and how the banks’ underwriting standards on key borrower characteristics may have changed since the beginning of the housing crisis.

The Federal Reserve survey is conducted each quarter among senior lending officers and covers, in addition to residential lending, other consumer loans, commercial real estate lending, and commercial and industrial loans.  There were 58 domestic banks and 23 U.S. branches and agencies of foreign banks involved in the current survey.

One set of special questions asked officers how much more or less likely it is, compared with 2006, that the bank would originate a Fannie Mae or Freddie Mac (GSE) eligible 30-year fixed rate mortgage for home purchase to borrowers with FICO scores of 620, 680, or 720 paired with downpayments of either10 percent or 20 percent.  Fifty two banks responded, 32 of which were defined as large banks.

Likelihood of loan Now v. 2006

Underwriting Criteria  FICO Score/Downpayment – as a %

620/10%

680/10%

720/10%

620/20%

680/20%

720/20%

Much Less

 59.6

21.2

7.7

38.5

7.7

0

Somewhat Less

23.1

28.8

15.4

32.7

21.2

9.6

About the Same

17.3

48.1

71.2

28.8

63.5

78.8

Somewhat more

0

0

3.8

0

5.8

1.9

Much More

0

1.9

1.9

0

1.9

9.6

Lenders who answered “somewhat” or “much less likely” to any of the borrower categories were asked to indicate the most important factors leading to their answers:

  • Higher servicing costs if mortgage became delinquent,
  • The difficulty or higher costs of borrower obtaining private mortgage insurance,
  • The difficulty or higher costs of borrowers obtaining simultaneous second liens (piggy-back mortgages),
  • The higher risk of put-backs from the GSEs,
  • Basel III treatment of mortgage servicer rights,
  •  Increased concerns about legislative changes, supervisory actions or changes in accounting standards,
  • Greater concern about the banks’ exposure to residential real estate loans,
  • A less favorable or more uncertain outlook for house prices,
  • A less favorable or more uncertain economic outlook,
  • The prevailing spread of mortgage rates over cost of funds is insufficient to compensate for risks.   

The higher risk of GSE put-backs was citied most frequently by the loan officers with 34.1 percent calling it a very important reason and 25.0 percent calling is the most important reason.  The cost or difficulties of obtaining private mortgage insurance was the second most prevalent reason with 29.5 percent calling it very important and 18.2 percent the most important reason.  An uncertain outlook for house prices was considered somewhat or very important by a majority of lenders as were concern about the bank’s exposure to risk and concerns about other effects of legislative changes. 

Very few respondents indicated that their banks would reduce their holdings of residential real estate holdings over the next year.  Forty percent indicated they expected little change while 43.6 percent said that holdings would probably increase somewhat.

Another special question was to what the extent several factors might be affecting the banks’ ability to originate or purchase additional residential real estate loans.  About a third of the banks cited as a significant or most important factor periodic high loan application volume which exceeded their processing capabilities. Over half said that difficulty in completing timely and accurate appraisals was somewhat or very much a factor and about the same number called timely and accurate underwriting somewhat or very much a factor.  The other three factors – difficulty in securing servicing and loan processing help from other companies, hiring sufficient servicing or loan processing staff at the bank or limited balance sheet or warehousing capacity were never citied as the most important factor and most respondents considered them somewhat a factor or not a factor at all.

Almost a third of respondents said their banks were actively soliciting applications for HARP 2.0 loans and satisfying most demand as it came in.  Twenty-two percent said they were not actively soliciting applications but were satisfying demand and 47 percent said they had very little participation in HARP. 

Based on their experiences to date 9.6 percent of respondents said they expected that more than 80 percent of HARP 2.0 applications would be successfully completed and 23 percent anticipated a completion rate of 60 to 80 percent.  About 9 percent expected that the completion rate would be below 40 percent.

The banks’ willingness or ability to offer additional loans through HARP 2.0 was affected by the risk that the GSE might put back the mortgage, named as a very important or most important factor by 36 percent, the difficulty in obtaining resubordination of a known second lien, cited as very important or the most important factor by 23 percent, and the difficulty of obtaining transfer of private mortgage insurance coverage, 17 percent.  Difficulty is identifying junior lien holders was considered a problem by only one lender.

The other special question addressed the banks’ willingness to refinance underwater loans outside of HARP 2.0 for borrowers who have been current on their existing mortgage for at least 12 months.   Eleven percent said their banks were actively soliciting such loans and satisfying the demand; 37.7 percent said they were not actively soliciting such loans but were satisfying the demand as it came in and just over half said they were doing very little about refinancing such loans outside of HARP 2.0.

The traditional questions asked on the survey indicated that demand for prime residential loans has strengthened moderately and that standards for prime residential loans and home equity lines of credit remain essentially unchanged.

…(read more)

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