Mortgage Lending Underwriting Standards During the Housing Market Boom: Examiners' and Bankers' Views

Abstract

It is by now widely acknowledged that the too-lenient trend in residential mortgage underwriting standards over the past half-dozen years was a key factor propelling the housing boom, and is a principal reason that the “bust” now underway has spiraled into a broad-based credit crisis. Importantly, comprehensive, economy-wide documentation for mortgage lending underwriting trends (as compared to institution-specific analysis) is sparse. Hence, although industry observers understand this fundamental basis for the current turmoil in the financial system, a clear accounting of the nature and scope of underwriting trends is lacking. Indeed, the Federal Reserve Board’s Senior Loan Officer Opinion Survey on Bank Lending Practices (“Senior Loan Officer Survey”) is the only well-known economy-wide source of data on mortgage underwriting trends. However, the Senior Loan Officer Survey provides a relatively limited gauge of those trends: the quantitative information it provides is simply the net percent of surveyed banks easing mortgage underwriting standards in a given quarter. The OCC has developed a tool that addresses the dearth of detailed knowledge about the nature and scope of mortgage lending underwriting by banks: the agency’s annual Survey of Credit Underwriting Practices (“Examiner Survey”). That survey, which collects responses from examiners on their views about national banks’ underwriting practices, contains a much broader and deeper set of information than the Federal Reserve survey of senior bankers. Although heretofore the agency has not done so, as this Staff Report shows, it is possible to compare examiners’ perspectives on mortgage underwriting trends, as reflected in the OCC’s survey, with bankers’ views on these trends, as reflected in the Federal Reserve survey. In addition, because the Examiner Survey includes detailed information on specific mortgage underwriting practices not covered by the Federal Reserve survey, analysis of the OCC data can yield insights about the mortgage market not available from the Senior Loan Officer Survey.The primary purpose of this Policy Analysis Staff Report is to provide the first systematic comparison of bankers’ perspectives on mortgage underwriting trends, as reflected in the well-known Senior Loan Officer Survey, with examiners’ perspectives reflected in the OCC’s underwriting survey. One major observation emerging from the analysis is that bankers’ and examiners’ assessments of mortgage underwriting trends were roughly consistent with each other, especially during 2004-2006, when both groups reported persistent easing. The main exception is for the late-2006-early-2007 period, when bankers claimed they tightened mortgage underwriting standards sharply. OCC examiners did not agree, seeing instead a slight, but nevertheless continuing, easing of mortgage lending standards. Were OCC examiners correct in their significantly different assessment at that point? In the absence of a comparable “third party” set of information on underwriting practices it is not possible to answer that question definitively. Nevertheless, subsequent analysis in this Staff Report showing a strong consistency between examiners’ summary or overall assessment of underwriting practices, and their assessments of specific, detailed components of mortgage underwriting practices enhances the credibility of examiners’ story.