Banks and other Mortgage lenders have spent much time, effort and money in training, systems, procedures and processes to help ensure their compliance with all the new, and existing, rules and regulations governing mortgage lending and consumer protection.
Don’t look now, but somebody thinks that some banks may have left the barn door open and the credit risk is now running loose. The Office of the Controller of the Currency (Now, don’t that sound important?), or OCC as they’re known, believes that banks may be playing a little fast and loose when it comes to the credit risk in their recent mortgage lending (High Risks).
Although banks may have moved away from FHA loans because of the compliance risks to make up for the shortfall in mortgage lending, have they now relaxed their credit standards to help originate more conventional loans. Although most of their balance sheets and reserves may seem healthy today, the question is, “Will the loans being originated now, at these eased credit standards, perform as expected in the future.” If not, it may have a devastating impact of the bank’s bottom line.
According to the Comptroller of the Currency, Thomas Curry, with the easing of credit standards, banks may overlook the increasing credit risks in current production when their asset quality is still strong and lending is profitable.
Mr. Curry noted that in the fourth quarter of 2014, OCC-supervised banks’ asset quality was just about that of the historically high levels in 2006. Does this provide them with some false sense of security? By the way, that happens to be just before the financial crisis in 2008.
For now, things are going well but banks need to be aware of what may be on the horizon and prepare for what could go wrong. As we know, things can turn on a dime or in today’s market maybe that’s a quarter. Everything is now more expensive.
Banks need to keep a close eye on both the compliance quality and the credit quality of the loans they are originating. Otherwise, they may be originating their way right back into trouble. We’ve seen that movie and it really doesn’t end well.