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HEL Lending Tightens as Banks Loosen CRE Requirements

HELs see most tightening among all categories

Jan. 31, 2014

By Mortgage Daily staff

Among all types of lending at banks, underwriting standards have increased the most on home-equity products. A sizable share of commercial real estate lenders, however, have eased requirements, and CRE risk is projected to rise.

Among banks that participate in retail lending, residential real estate loans made up the largest share of their portfolios, followed by home-equity loans.

Residential real estate loans were originated by 91 percent of banks, though 3 percent exited residential lending during the past year. None plan to exit home lending in the coming year.

The findings were reported in the 19th annual Survey of Credit Underwriting Practices from the Office of the Comptroller of the Currency.

The report reflects activity from 86 banks with assets exceeding $3 billion from Jan. 1, 2012, through June 30, 2013. Only loans that accounted for a significant portion of the banks' activity, or loans in portfolios of more than $10 billion, were considered for the report.

In all, $4.5 trillion in loans were reflected in the latest study.

Among the 78 residential lenders, more than three quarters have maintained their underwriting standards. Lending was tighter at 13 percent, and just 11 percent eased standards.

Out of all types of bank lending, HELs saw the most tightening in underwriting.

On conventional HELs, nearly three quarters of banks maintained underwriting standards, and 22 percent tightened lending requirements. Only 5 percent eased standards.

Among just four banks that originated high loan-to-value HELs, two banks have dropped the product since the 2012 survey and another plans to exit the business. Among those that remained, half tightened guidelines and the other half kept them the same. None of the high LTV HEL lenders eased standards.

For all types of retail lenders, 84 in all, regulatory policies were behind tighter standards at more than 40 percent of lenders that were more strict, while nearly 40 percent were driven by risk appetite. More than 40 percent of this group utilized documentation requirements to implement stricter standards and nearly 40 percent used debt service.

Among retail lenders that eased policies, more than 40 percent were motivated by the economic outlook and a slightly bigger share were driven by competition.

Most of the 14 banks that offered residential construction loan products hadn't made any changes to their guidelines. Tighter guidelines were reported for 8 percent, and none eased requirements.

"Almost all surveyed banks offered at least one type of CRE product," the OCC said. "While the majority of banks' underwriting standards remained unchanged for CRE, a declining percentage of banks continued to tighten standards across all three CRE products, while an increasing percentage of banks eased standards in commercial construction and other CRE."

Excluding residential and construction loans, CRE programs were offered by 75 banks. Guidelines were unchanged at more than two thirds of the group, while nearly a quarter eased their requirements. Just 8 percent tightened their lending standards.

More than a third of examiner responses expected an increase in CRE risk over the next 12 months because of concerns with the economic environment, collateral values, and easing underwriting standards.

In 2008, underwriting standards varied between CRE loans originated for investment and originated for sale at one-in-five banks. But the disparity dropped to 0 percent by 2010 and has stayed near there since.

Of the 35 banks that offered commercial construction loans, the majority -- 71 percent -- made no changes to their standards. But 18 percent eased standards, while 11 percent were tighter.

For all types of commercial lending, more than 80 percent of banks that eased underwriting standards did so due to competition.

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