Garnet Capital Advisors Blog

May 9, 2014

US banks lower lending standards

Many U.S. banks recently reduced their standards for mortgage lending, and this development could boost loan sales by increasing the availability of this type of debt.

Lenders ease standards
Wells Fargo, America's largest home lender, made headlines by lowering its minimum credit score for loans backed by both Fannie Mae and Freddie Mac to 620 from 660, according to Bloomberg News. This move came after smaller banks, such as the U.S. business unit of Canada's Toronto-Dominion Bank, loosened their standards.

Many financial institutions are rethinking their approach after harnessing strict lending guidelines following the financial crisis, the media outlet reported. In the aftermath of this event, banks used the most stringent credit standards in more than 20 years. Ellie Mae indicated that by 2011, the credit score of the average approved mortgage surged to 750.

"We threw the baby out with the bathwater because we had to," Rick Soukoulis, chief executive officer of San Jose, California-based lender Western Bancorp, told the news source. "From there, you start to inch back. If you keep selling only what isn't selling, you're just dead."

Drop in refinancing
Wells Fargo, and other major lenders, have another big reason to reconsider their approach to mortgage lending, according to San Francisco Business Times. In 2013, the refinancing flood slowed to a trickle as borrowing costs moved higher.

Between November 2012 and late August 2013, interest rates on 30-year fixed-rate mortgages surged to 4.48 percent from 3.31 percent, according to Freddie Mac survey data reported by Bloomberg News.

Before refinancing dried up, lenders relied on it as a major source of revenue, the media outlet reported. Amid the new situation, banks are hoping that easing standards will help revitalize the housing market.

Some welcome this development of loosening credit requirements, asserting that the lenders overreacted in the aftermath of the financial crisis. Many have argued that making mortgage requirements too stringent prevented many individuals from obtaining homes.

"The pendulum swung too far," said John Taylor, CEO of the National Community Reinvestment Coalition, a Washington-based organization that helps people in the low- to middle-income range obtain the credit they want, according to the news source. "They over-tightened the standards to the point where qualified borrowers couldn't get access to credit."

Others are warning that credit is becoming too loose, providing reminders of the conditions that helped fuel the financial crisis. We are still far away from times like those, according to San Francisco Business Times.

Individuals who want to get involved in loan sales as mortgage lending eases might consider contacting Garnet Capital Advisors, which has significant experience with these transactions.