November 20, 2014

Banks are finding it difficult to generate prime loans

Many banks have been encountering challenges in their efforts to originate high-quality loans, but have been taking steps to compensate for this situation.

Banks suffer falling demand
In a recent Federal Reserve survey of loan officers, roughly one-quarter of the banks that grant jumbo mortgage loans reported falling demand during the three months ending in September, according to The Wall Street Journal.

When it came to prime mortgages, financial institutions reported stagnant activity, with most indicating interest in these financial products was unchanged during the period, the media outlet reported. Approximately one-fifth indicated greater demand for these mortgages granted to prime borrowers, and the opposite result was reported by around one-fifth.

In terms of commercial lending, 10 percent of banks indicated weaker demand from firms with sales of $50 million or more, while 26.3 percent reported greater interest, according to the news source. When it came to small businesses, fewer than 10 percent of financial institutions indicated increased demand.

Falling lending standards
To cope with these headwinds, many banks have been lowering their lending standards in an effort to protect revenue, The Wall Street Journal reported. A "moderate net fraction" of these financial institutions made it easier for potential borrowers to obtain prime residential mortgages, while a "modest percentage" indicated less-stringent conditions for acquiring commercial and industrial loans.

In addition, one-quarter of banks participating in the survey indicated they had softened their business loan pricing terms amid stiff competition for this form of lending, according to The Wall Street Journal.

Subprime auto lending, an area that has repeatedly grabbed the attention of regulators, also felt the impact of changing market dynamics, as a handful of banks have made it easier for borrowers to obtain this type of credit, MarketWatch reported. When explaining this change, financial institutions pointed to the banks and non-banks vying for market share.

Working with a loan sale advisory
Amid this situation, banks have many options they can use to build their loan portfolios. While they can potentially lower their credit standards or shift up their marketing, a better way to acquire more high-quality loans is to buy them.

To ensure the right purchase is made, banks should speak with Garnet Capital Advisors. An experienced loan sale advisory, Garnet has deep knowledge of these transactions and has facilitated sales involving a wide range of debt types.