In the April 2015 iteration of the Senior Loan Officer Opinion Survey (SLOOS), the Federal Reserve Board included a special question on residential real estate lending. That special question asked banks about how they had responded to new guidelines issued by the GSEs on November 20, 2014, on the definition of life-of-loan representation and warranty exclusions. These policies were designed, in part, to reduce uncertainty and increase transparency about the conditions under which securitized mortgages would be returned to the bank that originated the loan.
In response to the new GSE-issued guidelines, and given information about only the credit score and the down-payment amount, banks’ likelihood of approving mortgage applications largely varied with the credit score. Given a consistent down-payment amount, banks were more likely to approve mortgage applications from households with higher credit scores and were less likely to approve mortgage applications from those households with comparably lower credit scores. In contrast, the amount of the down-payment, holding the credit score constant, had little discernible impact on banks’ likelihood of approving a household’s mortgage application
The net likelihood of approving a mortgage application under a given credit score and down-payment is equal to the percentage of banks saying that they are more likely to approve a mortgage application minus the share of banks saying that they are less likely to approve a mortgage application under the given credit score and down-payment information. The share of banks saying that the approval was “about the same” is not included. As a result, a positive net percentage means that banks are more likely to approve the mortgage application and a negative net percentage means that banks are less likely to approve the mortgage application.
Banks, on net, were less likely to approve mortgage applications with a credit score of 620 and a down-payment equal to 20% of the home’s value, but they were more likely, on net, to approve a mortgage application when the credit score jumped to 680, but the down-payment remained at 20%. This pattern holds with lower down-payments. At a 10% down-payment, banks, on net, were less likely to approve a mortgage application if the credit score was 620, but more likely, on net, to approve it if the credit score was 680, and even more likely to approve the application, on net, if the credit score was 720. Even with a down-payment of 5%, banks were, on net, more likely to approve a mortgage application if the credit score was 680 and less likely, on net, if the credit score was 620.
However, no matter the down-payment amount, banks were less likely, on net, to approve a mortgage application if the credit score was 620, but they were more likely, on net, to approve the mortgage application if the credit score was 680 or above.
Variation across all bank respondents masks the different responses to the GSE-issued guidelines by bank size. The Federal Reserve’s SLOOS distinguishes responses by large national banks and smaller, but not small, regional banks. In response to the new GSE-issued guidelines, large banks, on net, are more likely to approve mortgage applications, no matter the credit score or the down-payment amount.