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MORTGAGE CREDIT EASES AS DEMAND INCREASES IN Q2 By Mark Lieberman, Chief Economist for the Five Star Institute The percentage of banks reporting stronger demand for mortgage loans rose in the second quarter compared to the first, with more banks easing lending standards, the Federal Reserve reported in early May. The results, revealed in the quarterly Senior Loan Officers Opinion Survey, are consistent with anecdotal reports that mortgage loans are becoming easier to obtain. The Fed's survey results are reported as a diffusion index; that is, the percentage of respondents saying they are easing lending standards "somewhat" or "considerably" is subtracted from those who report they are tightening standards for a range of different lending products. In the case of traditional mortgage loans, a net 7.8 percent of banks reported easing lending criteria in the second quarter, compared to a net 4.6 percent who reported easing in Q1. Of the banks surveyed, 1.6 percent reported tighter loan standards in the second quarter, and 9.4 percent said they eased somewhat, while 89.1 percent said standards were unchanged. While the survey results suggest a trend in lending standards, they could be misleading. A bank that has tightened lending standards as much as possible may not necessarily ease them, but cannot tighten any further. (It would be the equivalent of tightening a faucet as far as possible; not tightening further does not mean loosening it.) In the survey, 16.7 percent reported tighter standards for subprime loans, although 59 of the 65 banks surveyed said they no longer deal in subprime loans. No banks reported tightening or easing standards for "non-traditional" mortgages, which the Federal Reserve said include, but are not limited to, adjustable-rate mortgages (ARMs) with multiple payment options, interest-only mortgages, and Alt-A products such as mortgages with limited income verification and mortgages secured by non-owner-occupied properties. The survey results showed 73.3 percent of respondents said demand for non-traditional 30 loans was unchanged from the first quarter to the second. At the same time, more banks reported stronger demand in the second quarter for subprime loans, with 16.7 percent saying demand increased and 83.3 percent saying it was unchanged. The subprime sample, however, included only six banks. A net 39.1 percent of banks surveyed said demand for prime mortgages was stronger in the second quarter than in the first. In the first quarter, 19 percent of banks surveyed reported stronger demand from the fourth quarter. Of the banks surveyed in the second quarter, 45.4 percent said demand was either moderately or substantially higher, while 6.3 percent described it as moderately weaker. A net 3.1 percent of lenders said they had eased standards for home equity lines of credit (HELOCs)—3.1 percent tightening and 6.2 percent easing—while 90.8 percent said standards were unchanged. A net 13.8 percent said demand for HELOCs had weakened—7.7 percent said it was stronger and 21.5 percent claimed demand weakened). Another 70.8 percent reported HELOC demand was unchanged. The survey also asked lenders the likelihood (compared to a year ago) of approving applicants at different credit score levels. Of those surveyed, a net 32.7 percent said they were less likely to approve a borrower with a score of 580, 30.9 percent said they were less likely to approve an applicant with a score of 620, and a net 3.4 percent said they were less likely to approve an applicant with a FICO score of 660. Demand for commercial real estate (CRE) loans continued to strengthen in the second quarter, with a net 40.3 percent of banks reporting stronger demand, matching the first quarter but down slightly from 44.1 percent in the fourth quarter of 2012. A net 20.9 percent of banks reported easing standards for CRE loans in the second quarter compared with 13.4 percent of banks who said the same in the first quarter. APPRAISAL INSTITUTE JOINS GROUPS TO FORM PROPERTY STANDARDS COALITION The Appraisal Institute joined other organizations for a two-day meeting in early May to form a coalition in an effort to develop and embed a single standard for the way properties are measured worldwide. The International Property Management Standards Coalition (IPMSC) was created during the meeting that took place in Washington, D.C., after several other groups worldwide signed a document for its formation. Some of the organizations that signed on include Australian Property Institute (API), Building Owners and Managers Association (BOMA), Council of European Geodetic Surveyors (CLGE), and the International Monetary Fund (IMF). Currently, the method in which property assets are measured varies greatly from country to country, which can be problematic for global investors and occupiers and can lead to errors in financial reporting, the Appraisal Institute explained. Consequently, these errors can undermine market confidence and economic stability. "Given the variances in how property assets are measured from country to country, this is an important effort with wide ramifications for the future," said Appraisal Institute president Richard L. Borges II, MAI, SRA. "In joining this prestigious coalition, the Appraisal Institute continues to serve as the premier international real estate valuation leader." During the meeting, representatives of the groups that joined the IPMSC agreed on their next steps, which involve creating an independent standards development committee and a program for wider industry and stakeholder engagement. STAT INSIGHT $117,951 The average American's household debt, including the mortgage. Source: Sandy Botkin, former IRS attorney, CPA, and author

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