Fed: Borrowers Could See Relaxed Mortgage Standards in 2016

With less than two months left in the year, many home buyers are looking ahead to 2016. So the Home Buying Institute has been publishing a variety of “forward-looking” reports involving home prices, mortgage rates, and other housing-related trends. This time around, we turn our attention to mortgage standards in 2016.

A new industry survey from the Federal Reserve revealed that mortgage lenders have eased the standards used to qualify borrowers for conventional home loans. This is good news for borrowers who are planning to purchase a home in 2016. Relaxed mortgage standards could make it easier for marginally qualified borrowers to secure financing.

Some Banks Ease Mortgage Standards, Going Into 2016

On November 2, 2015, the Federal Reserve published the findings from its latest Senior Loan Officer Opinion Survey. This quarterly survey is sent to up to 80 large domestic banks in the U.S., as well as 24 U.S. branches of foreign banks. As a result, it’s a pretty good indicator of mortgage qualification standards and trends.

With regard to home loans, the latest survey showed the following:

“Regarding loans to households, banks reported having eased lending standards on loans eligible for purchase by the government-sponsored enterprises and on qualified mortgage (QM) loans over the past three months on net.”

The “government-sponsored enterprises” (GSEs) mentioned above are Freddie Mac and Fannie Mae. Mortgage lenders often sell the loans they originate to the GSEs, as a way to reduce risk and increase liquidity. So the easing of mortgage standards mentioned above mainly refers to conventional home loans — those that are not insured by the federal government.

A Different Story for FHA and VA Loans?

Over on the government side, it seems that standards might actually be tougher for FHA and VA loans. According to the Fed’s November report: “In contrast [to the easing mentioned above], modest net fractions of banks tightened standards on government residential mortgages.”

In this context, “government residential mortgage” includes home loans that are insured or guaranteed by the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA). This category also includes purchase mortgages that are originated under the U.S. Department of Agriculture home loan programs.

So we have some mixed results here. Senior loan officers have reported some degree of easing for conventional home loans, while standards seem to have increased a bit for government-insured products.

Pros and cons: Conventional vs. FHA loans

The bottom line: Reasonably well-qualified borrowers should be able to secure financing in 2016, and it might even be easier on the conventional side. Meanwhile, lenders appear to be setting higher standards for FHA and other government-insured home loans.

Still No Love for Subprime Borrowers

The latest survey also provided some insight into mortgage standards for “subprime” borrowers. According to the Federal Reserve’s report, most banks said they “do not extend home-purchase loans to subprime borrowers.”

These are borrowers with weak credit histories resulting from payment delinquencies, charge-offs, bankruptcies, etc. The subprime category also includes borrowers with “reduced repayment capacity” as indicated by their credit scores or debt-to-income ratios. Would-be home buyers who fall into this category are often turned down for financing.

About the Survey
The Federal Reserve’s “Senior Loan Officer Opinion Survey on Bank Lending Practices” solicits input from more than 100 banks across the United States. The goal is to gain insight into current mortgage lending trends and standards, based on survey responses. The Federal Reserve typically conducts the survey once per quarter. They time it so they can publish the results before the regularly scheduled meetings of the Federal Open Market Committee (the Fed’s “think tank”). On occasion, the Federal Reserve will conduct one or two additional surveys during the year, to gain additional insights into mortgage standards and trends for 2015 – 2016.