Cross-Posted at My Left Wing
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.
“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.”
The regulator, which oversees nationally chartered banks, surveyed the largest 71 institutions, including Bank of America, Wells Fargo and Citigroup, whose $2.9 trillion of loans represent 90 percent of outstanding national bank loans.
“Ambitious growth goals in a highly competitive market can create an environment that fosters imprudent credit decisions,” Grunkemeyer said in a statement. “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.”
There has been a great deal of debate about the existence of a housing bubble. Some argue that low interest rates unlocked pent-up demand, while others argue that low interest rates created an asset-bubble.
There are several anecdotal signs of bubbles, with two of the more prominent being increased used of non-traditional or exotic financing methods and a lowering of credit standards for purchasers.
Over the last year and a half, the financial press has spotlighted the increased use of ARMs and Interest-Only Loans. While ARMs are less exotic, interest-only loans in the residential market are definitely non-traditional for most purchasers.
However, there has been little written about the effects of these standards on banks balance sheets. Currently, banks are in good shape, with charge-offs at delinquent loans at manageable levels. According to data at the Federal Reserve, banks look pretty good.
But, at some point as yet undetermined, a system assumes too much risk. Consider that household debt as a percentage of assets is at its highest level in over 20 years and the real wages after inflation have only increased at a .29% compound rate for the last 5 years. In other words, banks may be lowering their standards to people who are already highly leveraged by historical standards.
I do not know if this is the straw that will break the camels back. However, it is another straw to consider.
