Fed survey shows tighter credit for subprime and non-QM mortgages
Lenders are pulling back on mortgage credit, particularly for borrowers with weaker credit profiles, as the cooling housing market prompts a more conservative lending posture, according to the latest Federal Reserve survey of bank loan officers.
The central bank’s Senior Loan Officer Opinion Survey pointed to a broad trend of tightening residential real estate lending standards and weakening demand during the first quarter across most mortgage categories.
While underwriting criteria remained largely unchanged for loans eligible for sale to Fannie Mae, Freddie Mac, and federal agencies, a significant share of banks reported tighter standards for riskier subprime mortgages and loans that fall outside qualified mortgage (QM) rules.
There was a noticeable tightening for non-QM loans, subprime mortgages, and certain qualified non-GSE mortgages. Home equity lines of credit (HELOCs) also faced stricter requirements. Interestingly, large banks bucked this trend, reporting a net easing of standards for most residential loans.
Demand was also notably weaker in these non-QM and subprime segments.
“Banks reported weaker demand, on balance, for all categories of residential real estate (RRE) loans and HELOCs over the first quarter,” the report read.
Commercial real estate (CRE) lending also experienced a tightening of standards across all loan types. This was more pronounced among smaller banks compared to larger institutions. Demand for construction and land development loans, multifamily property loans, and loans secured by non-farm and non-residential properties all weakened.
Read more: Commercial, multifamily originations stall as owners hold off on major moves
Banks cited a range of factors for these changes, including a less favorable outlook for commercial rents, vacancy rates, property prices, and the overall economic landscape. Rising interest rates decreased customer acquisition and development activity, and a less optimistic outlook for rental demand was also identified as a reason for weaker demand.
The tightening of lending standards and terms was evident in various aspects of CRE lending, including wider interest rate spreads, reduced maximum loan sizes, lower loan-to-value ratios, increased debt service coverage ratios, and shorter interest-only payment periods.
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