Home

Small Lenders Obliging to Slightly Risky Borrowers; Are Lending Standards Loosening?

As mortgage rates slumped to 2014 lows last week, small lenders have started obliging slightly risky borrowers, showing that industry lending standards could be loosening for the better.

According to a report in Bloomberg, smaller mortgage firms are now approving home loans for people who saw a temporary dip in their credit scores of a short loss of employment with more than 15 companies rolling out mortgages for slightly risky customers. Some of these loans either have high interest rates or huge down payments, while others aren't even government insured.

Though the volume of lending is low - about 1 percent of the total $1 trillion home loan market - the small step taken by these firms could mean that lending standards could start to loosen.

This whole year, mortgage rates have remained at record lows but the home-buying activity or mortgage applications hardly equaled the low rates partly due to the slow economic growth and tight lending standards.

Large banks have been hesitant about lending to low-income borrowers and that has largely held back a full housing recovery.

"While housing has seen some positive growth throughout the year, there is no denying that tight credit conditions are hindering a full, healthy housing recovery. These persistently tight mortgage credit standards continue to limit the number of creditworthy borrowers, particularly younger families and first-time home buyers, from entering the housing market," David Crowe, chief economist at NAHB, said in a statement.

But more recently, lending giant Fannie Mae's latest Mortgage Lender Sentiment Survey showed that credit standards could loosen up in the next three months as more financial institutions try to boost mortgage purchase activity before the end of the year.

Last month, a survey of 75 domestic banks and 23 U.S. units of foreign banks by the U.S. Federal Reserve revealed that there was a widespread ease in lending on the increasing demand for mortgages.

As the employment scenario brightened this past week, demand for mortgages went up. According to the Mortgage Banking Association, the total volume of home loan applications went up 5.6 percent on a week-over-week basis with refinancing applications taking up 11 percent of the hike.

While the Fed did hint at a rate hike by the middle of 2015, industry experts are urging people to strike while the rod is hot.

"I will say that with all the volatility in the economy, the rates are not dropping as quickly as we would like them to be, but we are certainly looking at a sustained pace of lower interest rates. If you can lock in a rate in the 3 percent range, you're doing yourself a huge favour," Melissa Cohn, president of GuardHill Financial Corporation, told CNBC.


Join the Discussion
Real Time Analytics