Lending, or the lack thereof, has been a hot button issue since the housing bubble burst seen in the mid-2000's. The recession of 2009 quickly followed and many would-be buyers found themselves out in the cold, unable to procure a home mortgage.
The latest survey from the National Association of Realtors found that home sales could be higher if there was a return to "reasonably safe and sound lending standards."
Lawrence Yun, NAR chief economist, said there would be enormous benefits to the U.S. economy if mortgage lending conditions return to normal. "Sensible lending standards would permit 500,000 to 700,000 additional home sales in the coming year," he said. "The economic activity created through these additional home sales would add 250,000 to 350,000 jobs in related trades and services almost immediately, and without a cost impact."
What does a sensible lending standard mean in today's housing market? Today's buyers and builders are faced with incredibly tight lending standards. Lenders are taking too long to approve applications, causing deals to fall through and high numbers of contact cancellations.
Many lenders are requiring lengthy back histories from potential lendees, as well as a 20 percent downpayment, something that is out of reach for many cash-strapped buyers.
Only those with the best of credit are receiving today's best rates. Respondents to the NAR survey report that 53 percent of loans in August went to borrowers with credit scores above 740. In comparison, only 41 percent of loans backed by Fannie Mae had FICO scores above 740 during the 2001 to 2004 time period, while 43 percent of Freddie Mac-backed loans were above 740.
In 2011, about 75 percent of total loans purchased by Fannie Mae and Freddie Mac, which are now a smaller market share, had credit scores of 740 or above.
While the Office of the Comptroller of the Currency defines a prime loan candidate as one having a FICO score of 660 or above, the FHA reports the average credit score for a denied application was 669.
Some would argue that lenders are right to be so cautious, because of the tremendous number of foreclosures that flooded the market after the burst, coupled with falling home prices. Today's buyers, as well as home values, are proving themselves worthy, however.
Yun said home buyers in recent years have been highly successful. Since 2009, the 12-month default rates have been abnormally low. Fannie Mae default rates have averaged 0.2 percent while Freddie Mac's averaged 0.1 percent, which are notable given higher unemployment in the timeframe.
According to the NAR, defaults peaked in 2007 at 3.0 percent for Fannie Mae and 2.5 percent for Freddie Mac.
Yun said prices are now moving in the right direction as well. "There is an unnecessarily high level of risk aversion among mortgage lenders and regulators, although many are sitting on large volumes of cash which could go a long way toward speeding our economic recovery. A loosening of the overly restrictive lending standards is very much in order," he said.
Published: September 24, 2012
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