BB&T announced better than expected financial results on Thursday, with second quarter earnings coming in at 0.77 per share, .03 higher than estimates, and revenues of $2.5 billion. A press release from the bank said these were the best quarterly results ever and credited the bank's best credit quality levels in five years.
In an interview with CNBC's Andrew Ross Sorkin following the release BB&T Chairman and CEO Kelly King said loan underwriting standards may have loosened too quickly since the 2008 crash. Going into the Great Recession, he said, underwriting had become too liberal and then it tightened dramatically after the crisis hit. Now it is about halfway back to the "too liberal" standards.
"I have been doing this for 41 years now," King said. "Usually, we go in a 10-year cycle of memories from the bad times to forget all the bad loans and start making bad loans again." He said he was a little concerned that underwriting standards have been "coming back faster" than he had expected.
King also said that the steeper yield curve is not having a material impact on his bank in the short run because the short end is still very low. It is impacting BB&T.'s mortgage business, he said, because as the rates rise the refinancing business is going down. "But as it begins to steepen on a permanent basis you will see all rates rise and that will be good for us because we are asset sensitive. That means we have more assets to price up as the rates go up than liabilities." Right now, he added, the affect is sort of muted except for mortgages and in the long run it will be positive for BB&T.
Kings remarks about lending standards drew quick reaction from several MND readers. Constantine Floropoulos of Quontic Bank said, "I couldn't disagree more that underwriting standards are getting too loose. In no way, shape, or form are we moving back toward the underwriting standards considered to be a key component in the melt-down. When worthy homeowners (families with children, small business owners, entrepreneurs, and veterans to say a few) can't get a loan to reduce their interest rate from 7% to 3.5% even with perfect credit, it's easier to make the case that guidelines are actually too tight. I'm not sure where Mr. King thinks we are with respect to the 10yr cycles he mentioned, but we're roughly 7 years away from the apex of loose underwriting and most originators would agree we have yet to make a meaningful movement back in the other direction.
Matt Hodges, Sales Manager at Presidential Mortgage Group concurred, saying "I find it amazing that BB&T considers current lending standards too loose "half way back to where we were before". Has Mr. King not seen the drastic changes in the industry over the past 6 years? Freddie Mac used to allow unlimited debt to income ratios 6 years ago. If you have perfect file, you might get to 50% now, but more likely a maximum of 45%. Has Mr. King not heard about the upcoming Qualified Mortgage (QM) changes that most lenders will roll out this Fall, capping debt to income at 43%? Is he not aware of FHA's change to MIP costs and their permanence for the life of the loan? Lenders are so concerned about buyback fears and fraud that the guidelines are extremely tight.