There’s a bit of irony in the fact that mortgage rates have been trending downward for the past ten years yet so have underwriting standards. Lower mortgage rates tend to bring customers to the lenders so why on earth would you loosen lending guidelines?
One possible explanation is the growing market share of mortgage brokers who bring in the business to the lenders. Over 70% of mortgage originations today start with a mortgage broker. This in-and-of-itself isn’t necessarily a bad thing. Upper management has placed emphasis on speed and cost but seems to have had little concerns about future risk.
Here’s the results of a recent Federal Reserve survey:
The Federal Reserve released their The April 2006 Senior Loan Officer Opinion Survey on Bank Lending Practices [FRB] last month [hat tip to Mish] and the general pattern showed that lenders were continuing to relax their underwriting standards. In fact, most respondents to the survey reported easing of their lending standards giving more aggressive competition as a primary motivator.
It will be interesting to see if the July report shows the same trend. We are already starting to see increased sensitivity to underwriting on a first hand basis in our appraisal practice. Mortgage brokers have been hiring us after lenders have been rejecting the ususal appraisal fodder they have been submitting for the past five years.
As a developer, I’ve certainly benefitted from the generous amount of money in the marketplace seeking out a real estate investment. I had not considered the increase in mortgage brokers as a source for looser underwriting standards, however.
Certainly here in DC, mortgage brokers are still looking to fill desks and keep placing loans, but I think the FOMC is right: it is the astonishing amount of money that is now in the industry is leading to looser underwriting standards. Blackstone just closed a huge portfolio, and many, many other companies are finding similar success. Unfortunately, there just are not that many good projects out there that provide the returns these companies are seeking. That means either return the money, look much, much harder for properties, or ‘tinker’ with the revenue projections.
About five years ago, Sam Zell spoke at the NYU REIT conference about the maturation of real estate into ‘yet another investment asset’ and the unimaginable amount of money that would bring. He felt it would continue to be hard to place the money, but that those owners who ran their properties like more traditional investments (ie no reciepts in a shoebox) would reap the benefits.