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A recent survey of senior loan officers (are there any others?) shows that credit standards for mortgage loans are loosening up a little. This easing is not in the government or subprime loan markets but rather in the areas of QM jumbo loans (Credit).
Many banks shy away from FHA lending and sub-prime loans. Although Independent Mortgage Lenders believe these products may help in the housing recovery, Banks fear the increased risk in these type of loans may lead to performance problems and increased losses. So, as the Independent Lenders take the lead in the government loan arena, banks are moving toward jumbo QM loans. Both may benefit.
Banks are loosening up their otherwise tight lending criteria to expand their lending to qualified borrowers seeking jumbo loans. These loans are usually made to more experienced second and third-time buyers of more expensive homes. Banks believe these are less risky than loans made to inexperienced homebuyers with low down payments. Plus, bigger loans generate bigger fees.
But is it all good. Lending at any level is risky and regardless of the size of a loan there is still some risk involved. Maybe not as much as when lending to first-time homebuyers or those with marginal credit but the bigger the loan the bigger the loss in the event of a default. One jumbo loan default at say $1.5 million can wreak havoc on any lender’s bottom line.
Just because the loan is larger and the borrower is more experienced it doesn’t mean it’s all upside. As we saw in the recent bust, people at all levels lost their jobs. The bigger they are the harder they fall. Banks need to be careful in just how far they go when easing their credit standards to attract these bigger loans.
Whether doing government, sub-prime or jumbo lending sound prudent underwriting is still the smart way to go. As in anything we do, there needs to balance. A sound, well-grounded lending strategy, coupled with a robust pre and post-closing audit program, supported by technology and training, will pay dividends.
There is no magic wand, pot at the end of the rainbow, or special product. There is no substitute for quality. Do things right and you’ll get the right results!
