For years lenders have been facing heavy political pressure to tighten credit. The three main tools advocated by legislators and regulators have been:
- Tighter credit standards – ensure borrowers are over-qualified.
- Strict buy-back agreements. Agencies can force lenders to buy back any loan for almost any reason, even if the loan is performing perfectly. This has led to the extremely heavy documentation requirements, as it is very expensive for a lender to buy back a loan, so they go overboard on documentation.
- Elimination of creative financing – today even interest-only loans, as an example, are considered “exotic.”
As the economy stalls, however, regulators are recognizing that lending standards are part of what is holding back a housing recovery. Lending is so tight, in fact, that delinquency rates on loans purchased by Fannie Mae and Freddie Mac are now close to zero. Historically Fannie and Freddie had delinquency rates of 1 to 3%, roughly. Since no system can be perfect, to make no bad loans at all you’ve got to turn down a lot of good loans. That isn’t good.
It’s clear that today’s lending system is not sustainable, and regulators are slowly making very minor adjustments. Over the course of the last few months they’ve relaxed underwriting criterion a little (mostly by lowering credit score requirements), and this month they’ve recommended loosening the buy-back policy. This should expand credit availability and allow folks who have been locked out of the first-time home-buying and move-up markets to get into the market.
How will this affect the market moving forward? With a lower unemployment rate, lower credit score requirements, and less fear on the part of lenders to make loans that are to be sold to Fannie or Freddie, we should see more folks tipping in towards buying a home.
In our area we have a dearth of listings, so it probably won’t make a great deal of difference. But in the rest of the country these small adjustments to the lending system could spark a revival of demand for housing; so much so, as a matter of fact, that some folks argue that it could overheat the market.
The best summary, though, comes from Bloomberg News in a May 14th report titled ”Mortgages Should Be Easier to Get.”
“It’s unclear how much the changes will boost mortgage lending or the housing market, but there’s no need to worry that they’ll bring back the crazy lending of the boom years. A return to that era is nowhere in sight, and delinquency rates on loans guaranteed since the crisis have been close to zero.”
What happens this summer will be interesting to watch. Stay tuned.
Casey Fleming, Author, The Loan Guide: How to Get the Best Possible Mortgage.
Mortgage Advisor, C2 Financial Corp.
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