Quality of Residential Mortgages Expected to Improve in 2013

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In its January release, which generally covers the fourth quarter of 2012, the Senior Loan Officer Opinion Survey documented answers by senior bank officers on their outlook for loan quality in 2013. On net, which is the difference between the percent of respondents expecting an improvement in loan quality and the share of respondents expecting weaker loan quality, senior bank officers expected the quality of household debt to strengthen in 2013. While improvement is expected across these household debt products, residential mortgages continue to report the greatest net percentage of respondents expecting an improvement in loan quality.

Chart 1 illustrates that the net share of respondents expecting the quality of prime residential mortgages to strengthen in 2013 exceeded the share expecting the quality of prime residential mortgages to improve in 2012. At the same time, fewer senior loan officers expect the quality of other household credit products to improve relative to their expectations for their improved credit quality in 2012. On net, the increase in the proportion of respondents expecting the quality of residential mortgages to improve in 2013 was 6.5 percentage points higher than the share expecting an improvement in prime residential mortgage quality in 2012. Conversely, the share of bank officers expecting the quality of home equity lines of credit to improve in 2013 was 4.1 percentage points less than its reported share for 2012. Meanwhile, the portion of respondents expecting the quality of credit cards to improve was lower by 3.2 percentage points.

Presentation1

The increase in the expectation that the loan quality of prime residential mortgages will improve reflects a shift away from the expectation that loan quality will weaken or remain unchanged. In a broader context, the increased expectation that loan quality will improve in 2013 follows earlier increases of improvement in other household debt products such as credit cards and provides additional evidence that consumer credit conditions are nearing a recovery. According to Chart 2, the share of respondents expecting the quality of prime residential mortgages to improve in 2013 was 4.3 percentage points higher than in 2012. Conversely, the percentage of respondents expecting the quality to weaken in 2013 was 2.2 points lower than in 2012, and the percentage expecting the quality to remain unchanged in 2013 was 2.1 points lower than in 2012. An expectation of improved loan quality may indicate that lending standards on prime residential mortgages could ease in the near future.

(Via Eye on Housing.)

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