Expectations among bank risk professionals for the relaxation of lending standards increased sharply in the first quarter, rising from 12.1 to 19.9 percent, according to the quarterly FICO/PRMIA) survey.

One out of five bank risk professionals now  expect the approval criteria for loans to become less stringent, the third highest level ever registered for looser lending standards in the three year history of the FICO survey.  The rising expectations for looser standards is a reversal of bankers’ views in the fourth quarter of 2012, when only 12.1 percent expected standards to become less stringent, the lowest level in survey history.

The survey, conducted for FICO by the Professional Risk Managers’ International Association (PRMIA), found lenders more bullish on the housing recovery than at any point in three years, with 71 percent of respondents saying home prices are “rising at a sustainable pace” in the context of mortgage lending risk. In addition, 39 percent of respondents are expecting mortgage delinquencies to decrease over the next six months, while another 45 percent expect delinquencies to remain flat and only 16 percent expect an increase.

However, there is also a high degree of concern about the supply of credit that will be available to finance the recovery.  Even though the Mortgage Bankers Association forecasted a 14.5 percent increase in purchase originations in 2013 over 2012, some 42 percent said that the supply of credit for mortgages to buy homes will he either slightly or significantly short of demand.  The survey found that that 60 percent of bank risk professionals expect the supply of credit for mortgage refinancing to meet demand.

“The latest survey results, combined with data that indicates the real estate market is improving in many regions, paint a positive picture for a sector of the economy that has been slow to join the recovery,” said Dr. Andrew Jennings, chief analytics officer at FICO and head of FICO Labs. “Mortgage lenders have been understandably guarded over the past five years. The improvement in their sentiment should be welcome news, and I wouldn’t be surprised to see lenders cautiously expanding their mortgage and home equity lending businesses.”