Previously this week we wrote about small lenders, and how community banks are picking up the slack when major lenders lessen their lending to low-income borrowers. The hold large banks had on the market decreased while community banks entered the market to lend to those that the top five banks weren’t comfortable with yet. While on some level this is good – helping the market expand after the recession and giving financial stability to low-income borrowers – there is still a potential downside.
As a Reuters article explained, new entrants still must learn the requirements that major banks have known for years, as well as the risk assessment tools needed to comply. The industry has also had more changes in the last few years than ever before, giving new entrants additional challenges.
“While mortgage experts said underwriting standards are stricter now than in the years leading to the financial crisis, the rush into the sector raises the risk that regulators might not be able to police them effectively,” the article wrote.
Smaller banks also have been found to take advantage of Federal Housing Administration-insured loans. These loans, typically given to low-income borrowers, were found on the balance sheets of community banks more often than major ones, and a recent Government Accountability Office announcement may encourage small banks to look into using credit and risk management software.
The GAO designated the FHA as “high-risk” this week due to the lack of capital held by the agency, below the required 2 percent, as well as its “rapid growth” in the mortgage sector. The GAO is urging the FHA to increase the amount of reserves held in case of a Treasury draw, and to protect against future crises like the recent one. Banks too may be looking to increase their risk protection as well.