More than 80 percent of lenders taking part in a recent American Bankers Association survey predicted that consumers will have reduced access to mortgages as a result of new industry regulations. In addition, one-third of respondents indicated that they will only make qualified mortgage loans.
Since banks will likely grant fewer mortgages to borrowers who do not have the strongest credit profiles, there will probably be fewer loans that carry a higher risk of default. This development could affect distressed loan sales by impacting supply-demand fundamentals.
A slim fraction indicated that they would have to cease lending activities entirely because of this new regulatory environment, according to American Banker. Of those who participated in the poll, 29 percent indicated they will provide QM loans, and will only extend non-QM credit in specific regions. Another 36 percent of respondents indicated that they have no plans to alter their existing underwriting practices.
ABA official notes impact of regulations
Robert Davis, executive vice president of the ABA, spoke about how the more stringent regulations will affect lending.
"The new mortgage rules are a serious challenge, especially in the near term, for mortgage lending," he said. "The problem will last at least as long as bankers calibrate their compliance systems, and perhaps much longer."
What this means for market participants
In this environment, banks involved in distressed loan sales should keep in mind that the stricter requirements limit the growth in these particular lines of credit. There were far more distressed loans to buy after the financial crisis, but these have been dwindling over the years.
These loans will always be made, with many of them being provided by the The United States Department of Housing and Urban Development, but the influx of these lines of credit is meager. As a result, interested buyers will have fewer portfolios for sale, and supply-demand fundamentals will likely push the price of distressed debt higher.
Lenders that set money aside to participate in these sales will eventually divert their resources to other areas that will provide them with stronger returns. Amid this environment of constricted supply, many lenders are having a hard time extending loans in the current economic conditions. As a result, many of them are hungry for loans, looking to take on these agreements with borrowers to bolster their income.
In addition, banks are frequently looking to consolidate their portfolios in-line with their expertise. Financial institutions might do this on the basis of product type, or alternatively, location. As a result of this trend, many banks will be looking to unload assets that do not fit in with these preferences.