The housing market may be coming back, but a growing number of policy makers have expressed concerns in recent months that it’s still too hard to get a mortgage.
But Duke noted another more surprising cause: the Fed’s campaign to push down interest rates means lenders haven’t had to work very hard to drum up business. Together with federal efforts to ease refinancing rules, low rates have produced a surge of refinancing business. This has delivered a steady stream of high-quality, low-risk borrowers in an industry that already has already shrunk significantly. Capacity-constrained lenders have “less incentive to pursue harder-to-complete or less profitable loan applications,” said Duke.
Fed staff research indicated that purchase-loan originations to borrowers with credit scores between 620 and 680 had dropped by 50% over the past 18 months, and such lending to borrowers with credit scores between 680 and 720 had fallen by 15%. Purchase loans to borrowers with higher credit scores had declined “only to a small degree,” she said.
The good news: as mortgage rates rise and refinance demand drops, the capacity constraints on lenders will recede and banks will begin to compete for more of those purchase loans. The upturn in home prices could also boost lenders’ confidence.
The bad news: Duke identified three “non-market” forces that are keeping lending standards tighter than they otherwise might be and that may be less likely to ease on their own:
–First, banks are requiring tighter rules to guard against the risk they’ll have to buy back defaulted loans from government-backed entities Fannie Mae and Freddie Mac , which have stepped up such demands after they were taken over by the government four years ago. Duke said that an effort by the firms’ federal regulator to clarify lenders’ potential “put-back” liabilities appears to have been insufficient to keep those worries from weighing on the market.
–Second, new federal and state rules associated with handling defaulted mortgages have raised the costs of mortgage servicing. While Duke said that many of those new rules have been needed to improve borrower protection, banks may find that the best way to avoid having to deal with defaulted loans is to stop lending to borrowers with low credit scores.
–Third, banks face a series of new federal regulations designed to protect borrowers from receiving unaffordable mortgages, but those rules could also keep credit standards tight if banks decide potential penalties are too onerous.
One commonly expressed attitude: If banks want to be tight, let them. If the past decade has taught us anything, the thinking goes, it’s that the economy is better off if everyone has to make large down payments and borrowers with only the best credit scores get mortgages.
The problem, says Duke, is that the economy may actually be worse off if the pendulum stays stuck at too tight, just as the economy was crippled when the pendulum swung too far in the other direction. The ability of newly formed households that are more likely to have lower incomes and credit scores to get loans “will make a big difference in the shape of the recovery,” she said. “Without first-time homebuyers, the move-up market will be sluggish, new and existing home sales will be more subdued, and purchase mortgage volumes will return only slowly.”
By Nick Timiraos