Big Banks Chill: Underwriting Standards Continue to Ease

A major survey by the federal government’s leading bank regulator, the Office of the Comptroller of the Currency, reports that lending standards for mortgage as well as commercial products hae eased for the third straight year.  The mortgage data confirms closing data from Ellie Mae and other sources over the past year.

“This year’s survey showed a continued easing in underwriting standards, with trends very similar to those seen from 2004 through 2006,” said Jennifer Kelly, Senior Deputy Comptroller for Bank Supervision Policy and Chief National Bank Examiner. “As banks continue to reach for volume and yield to improve margins and compete for limited loan demand, supervisors will focus on banks’ efforts to maintain prudent underwriting standards, monitor portfolio credit risk, and reduce exceptions to policy.”

The underwriting survey showed national banks and federal savings associations (banks) continued to adapt to changing economic conditions and competition by adjusting underwriting. Examiners noted that banks have eased underwriting standards and increased levels of credit risk in response to competitive pressures, abundant liquidity, and desire for yield in the low interest-rate environment. Large banks, as a group, reported the highest share of eased underwriting standards. Leveraged loans, indirect consumer, credit cards, large corporate loans, and international loans experienced the most easing in standards and continued the trend from last year.

Closing rates reported by Ellie Mae show significant improvement over the past two years, espe3ciqlly for purchase loans, and a steady decline in median FJCO scores for approved loans.

In November, 60 percent of all loan applications were approved, including 66.5 percent of purchase loans.  In 2013 the average closing rate was 54 percent for all loans and 60 percent for purchase loans.  Just two years ago, in November 2012, the average closing rate was just over half of all applications, 52 percent, and the average closing rate for purchase loans was 60.8 percent, virtually the same level as 2013, according to Ellie Mae.

Average credit scores have fallen significantly over the past two years.  Last month the average FICO score of 729 for all loans.  However, the average FICO scores of approved loans was 738 in 2013 and two years ago, in November 2012 it was 750. The Ellie Mae monthly data and insights are drawn from a robust sampling of closed loan applications that flow through Ellie Mae’s Encompass® mortgage management software and Ellie Mae Network™. In 2013, approximately 3.5 million loan applications ran through Ellie Mae’s Encompass mortgage management solution and Ellie Mae Network.

The OCC survey is a compilation of examiner observations and assessments of credit underwriting standards. The 2014 survey included 91 of the largest national banks and federal savings associations and covers the 12-month period ending June 30, 2014. The survey covered loans totaling $4.9 trillion representing approximately 94 percent of all loans in the federal banking system.