Banks Upbeat About Mortgage Performance, Looser Credit Looms

Mortgage lenders aren't rolling out the red carpet on home loans just yet, but with fewer delinquencies and defaults, there's optimism looser credit for home loans has become a topic of board room chatter.

FICO's first quarter survey of bank risk professionals found sentiments about loan repayment and credit availability more upbeat than in the last quarter.

The survey, conducted for FICO by the Professional Risk Managers' International Association (PRMIA), found fewer lenders expecting a rise in delinquencies on home loans, as well as car loans and small business loans, than at any time since FICO launched its survey in early 2010. The survey also examined sentiments on student loans and credit cards.

"As unemployment falls, even modestly, and four years of de-leveraging begin to pay dividends, bankers are allowing themselves to feel some optimism," said Dr. Andrew Jennings, chief analytics officer at FICO and head of FICO Labs. FICO is a leader in credit scoring systems.

The survey found the number of respondents expecting mortgage delinquencies to rise during the next six months was 12 percentage points lower than last quarter – dropping from 47 to 35 percent. Similarly, only 33.1 percent expect increases in home equity line delinquencies, compared to 44.3 percent last quarter. The overall trend in both categories has been trending more optimistic for the past eight quarters, FICO reported. Viewed another way, the number of respondents who believe mortgage and home equity line delinquencies will decrease hit an all time high, 26 percent and 23.1 percent respectively.

Optimistic reports

Another recent survey indicates lenders' expectations are on track. Home loan performance is already improving.

Lender Processing Service's (LPS) Mortgage Monitor report for February revealed the mortgage delinquency rate was down 5 percent month-over-month and 14 percent since last year. The 90-plus delinquency rate saw a monthly and yearly decline at 1.8 and 8 percent, respectively. LPS also found, while foreclosure inventories are still high, foreclosure starts were down 15.2 percent since January and 8.4 percent since February last year.

Lenders do, however, expect to see more strategic defaults, as consumers throw up their hands and walk away from their mortgage, even if they can afford it.

FICO found that 45.5 percent of lenders believe they will see an increase in strategic defaults in 2012 over 2011. Only 35.5 percent believe fewer homeowners will walk away, 19.2 percent of lenders were undecided on the issue.

Many homeowners are actually driving away from their homes.

Nearly half (49.2 percent) of lenders in the FICO study believe that the current generation of homeowners no longer considers their mortgages to be their most important credit obligation. Indeed, TransUnion recently found, among credit delinquent consumers, 39.1 were delinquent on a mortgage while current on their auto loans and credit cards. Far fewer were delinquent on credit cards (17.3 percent) or auto loans (9.5 percent) while current on their mortgages.

Lenders remain tight fisted

Even with refinance mortgage rates at record lows, some of that walk-away or drive-away behavior stems from the inability to draw equity, refinance the mortgage or obtain some kind of home loan workout.

Lenders aren't completely sold on the idea that a housing recovery is afoot. Mortgage credit remains too tight. In the FICO survey, the majority, 56 percent, believe the credit supply will not meet demand for residential mortgages over the next six months. However, the other 44 percent said the credit supply will either match or exceed mortgage demand.

"As lending risk - both perceived and real - declines, the natural reaction by lenders is to loosen the purse strings and extend more credit. This should be welcome news to consumers and businesses alike, because increased access to credit is a key driver of economic growth," Jennings said.

Mortgages could use some help with growth. LPS said new mortgage originations in January to February fell hard, dropping 16.9 percent, the year-to-year drop in mortgage starts was identical, down 16.9 percent.

There's hope.

In the FICO survey of lenders, a majority, 53.1 percent, believe that the housing market will be stronger at the end of the year than it is now.

"Of course, we're not out of the woods. Foreclosures continue to put pressure on home prices, and jobs are coming back slowly. But we seem to be headed in the right direction," said Jennings.


Written by Broderick Perkins
April 6, 2012

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