Banks Ease Lending Standards to Thrive
U.S. banks, faced with rising mortgage competition as home sales advance, eased lending standards for the first time in 11 years, the Office of the Comptroller of the Currency said Thursday.
“We see an increase in the easing of underwriting for both real estate and commercial products,” said Barbara Grunkemeyer, the agency’s deputy comptroller for credit risk. “The banks can take on a little more risk because their portfolios are in good condition.”
Existing home sales rose 2.7% in June, according to a report this week from the National Assn. of Realtors. The median home-sale price rose to $219,000 from $206,000 in May, a 6.3% jump that was the biggest on record. Still, as banks lowered their standards to compete with alternative forms of financing, they created additional risk in their portfolios.
“Ambitious growth goals in a highly competitive market can create an environment that fosters imprudent credit decisions,” Grunkemeyer said. “Higher credit limits and loan-to-value ratios, lower credit scores, lower minimum payments, more revolving debt, less documentation and verification, and lengthening amortizations have introduced more risk to retail portfolios.”
According to the survey, 28% of the banks reported easing their mortgage lending standards, 52% didn’t change, and only 10% tightened them. In the 2004 survey, the percentage of banks lowering their borrowing requirements was 13%, the same as those tightening them.
The comptroller’s annual survey of underwriting, released in Washington, showed that banks also eased standards for commercial loans during the last year. The regulator, which oversees nationally chartered banks, surveyed the largest 71 institutions, including Bank of America Corp., Wells Fargo & Co. and Citigroup Inc., whose $2.9 trillion of loans represent 90% of outstanding national bank loans.
The healthy economy has made it more probable that companies will seek out other forms of financing besides bank loans. That in turn forced banks to lower their standards to lure more customers.
“There’s a lot of liquidity in the marketplace, and banks are having to compete for these deals,” said Keith Leggett, a senior economist at the American Bankers Assn. “A lot of corporations, at least over the last year, have been able to really internally finance a lot of their expansions.”
