The Federal Reserve Stress Test: Residential and Commercial Mortgages

The Federal Reserve has released the conclusions of its “Comprehensive Capital Analysis and Review” (CCAR), also known as the “stress test.”  The Fed tested whether the major banks have enough cash and liquidity to withstand catastrophic losses in a financial crisis.  The Fed concluded that 15 of the 19 bank holding companies would be in relatively good shape.

To quote the Fed, “Strong capital levels are critical to ensuring that banking organizations have the ability to lend and to continue to meet their financial obligations, even in times of economic difficulty.”  As Realtors® recognize, an important lending ability by banks is making mortgages on homes and commercial properties.  Recently mortgage lending has been too tight.  This is illustrated by looking at Fannie Mae’s portfolio for new loans:  FICO scores are much higher than was the case during the 2004 time frame—a period when the residential markets were in relatively good shape.  The banks have plenty of cash and are in a position to get back to normal lending standards.

What Does This Mean for Realtors®?

Lending standards have been tight.  However, some banks are in better shape than others when it comes to making a loan.  Therefore, a potential buyer should not take a loan rejection as a final “No.”  Rather, it is appropriate to contact a number of lenders—major banks, regional banks, community banks, and financial institutions.