Big Banks Loosen Grip on Mortgage Credit

NEW YORK (MainStreet) — Still reeling from indications that the property market is taking a double dip, there is some good news from the housing sector: In its quarterly report the Federal Reserve reports that some big banks are starting to loosen their grip on home loans.

The April 2011 survey - which surveys senior lending officers at 55 U.S. banks and 22 branches of foreign banks operating in the U.S. on their lending practices - covers the last quarter.

In it the Fed concludes that bank lending standards and terms generally had eased somewhat further during the first quarter of this year, and that the demand for commercial and industrial loans (C&I) and for commercial mortgages increased, while that for residential mortgages continued to decrease. The banks also pointed to a more favorable or less uncertain economic outlook.

While it sounds confusing, the Fed's finding that credit standards went “unchanged” in the first quarter of 2011 is actually good news. Only 5% of U.S. banks surveyed actually tightened their lending standards, a fairly significant decline from the same period in 2010, the agency said.

Overall, 53 banks said their mortgage lending practices went unchanged, two banks said they had loosened theirs, and two banks said they tightened their mortgage loan standards. The good news for home loan borrowers is that the first quarter of 2011 was the first quarter in five years where the number of banks tightening their credit standards was matched by an equal number of banks loosening theirs.

While that’s great news for homebuyers – and sellers looking to ditch their pricey mortgages – the news is muted somewhat by the fact that fewer people are seeking home loans, says the Fed.

“Moderate net fractions of banks reported weakening demand for both prime and nontraditional closed-end loans as well as for home equity lines of credit,” the agency says in the report. “[But] demand for closed-end loans has now declined for three consecutive quarters.”

Mortgage analysts say the data is positive, but their feelings are mixed.

As Eric Green of TD Securities told Reuters, "This is definitely moving in the right direction, [but] demand for credit from households is not going to be the same for many years."

Borrowers will need to read between the lines of the Fed’s report to figure out what the banks are really saying. By and large, the loosening of mortgage credit is only for those the banks define as “prime” borrowers, or people with spotless credit.

If you’re applying for a mortgage loan in the coming weeks, expect a better chance of snagging it and to encounter the following standards, highlighted in the report: Minimum credit score standards are higher, down payments are higher (20% is the new normal) and required debt-to-income ratios are tighter.

Still, with banks easing their credit standards, home prices falling and the average rate for a 30-year mortgage this week at 4.68%, according to the BankingMyWay Weekly Mortgage Rate tracker, now might be the perfect time to buy a new home, if you can clear all the hurdles.

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