Banks tighten standards for jumbo and non-QM loans as economic challenges mount
Amid the backdrop of high-interest rates and economic uncertainties, banks have tightened their lending standards across several residential loan types and home equity lines of credit (HELOCs).
A recent Federal Reserve survey, which included responses from 62 domestic banks and 19 US branches of foreign banks, revealed that several banks have become more stringent with their lending criteria.
For instance, nearly a quarter (23.9%) of banks reported tighter standards for non-qualified-mortgage (non-QM) jumbo residential loans, while 26% did so for qualified mortgage (QM) jumbo loans. Similarly, stricter standards were applied to 20.4% of non-QM non-jumbo loans and 21.8% for HELOCs.
Interestingly, government residential mortgages have been less impacted by these tightening practices. The survey indicated that only a small fraction of banks, about 4.2%, reported stricter standards for these types of loans.
The reasons cited by the banks for tightening their lending criteria included a less favorable economic outlook, increased risk aversion, deterioration in the credit quality of borrowers, declining collateral values, and higher funding costs. These factors are driving banks to adopt a more cautious approach to lending.
The survey also sheds light on the impact of fluctuating mortgage rates, which soared past 8% and later stabilized in the 7% range during the third quarter. This fluctuation led to reduced demand for all residential real estate loan types.
Over 40% of banks noticed a decrease in demand across various loan categories, including GSE-eligible (42.9%), government (52.1%), QM non-jumbo non-GSE-eligible (57.1%), QM jumbo (56%), non-QM jumbo (63%), non-QM non-jumbo (61.4%), with subprime loans experiencing the most significant drop in demand (71.9%).
Read more: Brokerage owner shares how he reshaped his non-QM lending business
HELOCs, which had gained popularity as homeowners leveraged their increased home equity, also faced a downturn in demand due to the high-interest rate environment. About 30% of banks reported a decline in interest for HELOCs, echoing the broader trend of cooling demand in the mortgage sector.
Stay updated with the freshest mortgage news. Get exclusive interviews, breaking news, and industry events in your inbox, and always be the first to know by subscribing to our FREE daily newsletter.
