Credit Standards Should Tighten Through End Of 2022
Survey of senior loan officers cites reasons including inflation, credit quality, and reduced tolerance.
Senior loan officers across the country expect credit standards to tighten in the second half of 2022. Among the reasons cited in a Federal Reserve survey are deterioration in borrowers’ debt-servicing capacity; collateral values; credit quality of loan portfolios; and an expected increase in the exposure to interest rate risk due to higher inflation or inflation risk.
According to the Federal Reserve survey, “On balance, banks reported expecting to tighten lending standards across all loan categories … a significant net share of banks expected to tighten standards for nonconforming jumbo residential mortgage loans … and a modest net share of banks expected to tighten standards for GSE-eligible residential mortgage loans.”
The survey also looked back at the second quarter of 2022. Senior loan officers said that, over the second quarter, banks reported unchanged or tighter lending standards for most residential real estate (RRE) loan types and home equity lines of credit.
Banks, on net, reported basically unchanged standards for the following types of mortgages: government-sponsored enterprise (GSE)-eligible; government; qualified mortgage (QM) non-jumbo, non-GSE-eligible; and Non-QM jumbo residential.
A moderate net share of banks tightened standards for subprime residential mortgages, while modest net shares of banks tightened standards for QM jumbo and Non-QM non-jumbo residential mortgages, as well as for HELOCs.
Meanwhile, major net shares of banks reported weaker demand for all RRE loans over the second quarter, except for HELOCs, for which a significant net share of banks reported stronger demand.
Regarding RRE loans, the survey determined modest and moderate net shares of banks reported that lending standards for jumbo mortgages and HELOCs were on the tighter ends of their ranges, respectively. For GSE-eligible and government residential mortgages, banks reported levels of standards to be near the midpoint of their historical range. The net share of banks reporting that levels were at the tight end of the range was lower in the July 2022 survey than in the July 2021 survey for all RRE loan categories.