Wednesday, November 9, 2011

Senior Loan Survey: Residential Lending

Let's now look at the residential lending loan market, which the latest Fed lending survey described thusly:

Reports of strengthened demand for mortgage loans to purchase homes outnumbered reports of weaker demand for the first time since early 2010, perhaps reflecting refinancing activity.5 The number of banks reporting weaker demand for home equity lines of credit increased in the third quarter, particularly among smaller banks.

Few banks reported changes in standards on prime or nontraditional closed-end residential real estate loans, in line with the past several surveys. Similarly, very few banks reported any change in standards for home equity lines of credit, also in line with recent surveys.

Put another way, there was a slight bump in residential mortgage demand which was probably caused by refinancing activity -- a natural result of very low interest rates.

Let's take a look at the supply and demand data:

The chart on the left shows that demand has actually been weaker for quite some time (Remember -- this is a banking survey; there are many non-bank lenders in the residential mortgage business).  The chart on the right shows the last three years of activity, which has also been weak. 

The chart on the left shows the huge tightening in lending standards that started as it appeared the housing bubble was bursting.  The chart on the right shows the tightening spike, but also that lenders are no longer tightening.  That does not mean there has been a loosening of standards -- just that no more lenders are making it harder to get a loan.

What these charts show is there consumer demand is weak -- a conclusion that jibes with the continued drop in the various financial obligation ratios published by the Fed and this chart, which shows total residential mortgage debt outstanding: