U.S. Lenders Need to Remain Attentive to Credit Risk

Major financial institutions are beginning to relax their lending standards after years of applying heightened scrutiny in their processing of credit applications, according to a report from Bloomberg News. While this may help previously ineligible individuals and families secure financing to purchase a home, lenders will need to ensure that they have adequate risk management tools in place to protect the bottom line.

The trend toward more relaxed standards was attributed to a slowdown in refinancing activity, which has left banks feeling more of a need to compete for customers. Previously, institutions were being more selective because there was plenty of business to go around, especially with the federal government taking unprecedented steps to promote lending to home buyers.

Inside Mortgage Finance publisher Guy Cecala explained that “you make underwriting as tough as possible when people are lined up at the door and when the lines go away, you start loosening underwriting to get people back.”

Among the banks attempting to bolster new account acquisitions by opening the door wider are some of the nation’s biggest lenders, including JPMorgan Chase & Co., Bank of America and Wells Fargo.

In July, JPMorgan, which is the largest U.S. bank in terms of assets, informed the smaller lenders that it buys loans from that it will no longer consider Florida, Nevada, Arizona and Michigan to be “distressed” markets. Accordingly, it is demanding lower down payments on properties in those states. The institution has also reportedly loosened its underwriting requirements for a refinancing program available to Federal Housing Administration borrowers.

Wells Fargo spokesman Tom Goyda told Bloomberg that the bank has reduced the amount of equity it requires borrowers to come up with and is “always evaluating [its] credit standards in light of market conditions and trends.”

“Getting approved for a home loan hinges on a borrower’s total financial picture,” Goyda said, although he declined to elaborate further on which standards were being relaxed at his institution, which originated approximately 25 percent of U.S. home loans during the first half of 2013.

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