Easier credit, greater risk

"More Home Loans Go Sour," the Wall Street Journal reported Oct. 19 (D1), as easier mortgage standards are leading to increasing delinquencies. At the end of the third quarter, according to the article, mortgage delinquencies were at their highest level since 2003.

The article also noted the Oct. 18 release of a report from the Office of the Comptroller of the Currency (OCC) that found credit standards easing for the third year. In a news release, OCC announced the publication of its report which surveyed the 73 largest national banks over a 12-month period ending March 31, 2006.

The primary findings of the OCC report:

• Competitive pressures have led to a third consecutive year of eased credit underwriting standards. Examiners report that national banks have eased underwriting standards for both commercial and retail credit products.
• Demand for bank loans from nonbank investors has influenced underwriting terms for leveraged loans and pushed credit spreads lower. The easing of standards for leveraged loans has extended more broadly to other types of commercial credit.
• While current loan performance and overall loan quality remain sound, credit risk is increasing due to the continued weakening of underwriting standards.

Survey of Credit Underwriting Practices 2006 (pdf, 472KB, 39p., from OCC)