Fed Says Tight Bank Policies Hurting Recovery

The Federal Reserve urged lawmakers and the administration this week to take a more hands-on approach to the housing market because the market’s continued struggles is holding back strong economic recovery. In a report it just sent to legislative leaders, it said lenders are keeping lending standards too tight, in part because of their concerns over bad-loan buy-back policies of Fannie Mae and Freddie Mac.

Under the policies, the secondary mortgage market companies make banks take back their loans if the loans are found to be underwritten in such a way that borrowers are unable to maintain their payments.

In a Wall Street Journal piece today on the Fed report, the Fed is reportedly concerned that lenders’ hesitancy to loosen overly tight standards is keeping households from taking advantage of the ultra-low interest rates the Fed has been encouraging.

The Fed suggested the agency that regulates Fannie and Freddie, the Federal Housing Finance Agency, should allow the two secondary mortgage market companies to absorb some short-term losses to enable an improving housing market to buoy the economy. “Some actions that cause greater losses to be sustained by the [companies] in the near term might be in the interest of taxpayers to pursue if these actions result in a quicker and more vigorous economic recovery,” the Fed said, as reported by the Journal.

The Fed is also recommending Fannie and Freddie convert some of their foreclosed single-family houses into rentals to get them out of the for-sale inventory, helping prices, and also to help meet solid rental housing demand.

Access the Fed report to Congress.

Robert Freedman

Robert Freedman is director of multimedia communications for the NATIONAL ASSOCIATION OF REALTORS®. He can be reached at rfreedman@realtors.org.

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  1. I agree. It the secondary lenders made the bad loans, why not let them take the loss. Why should the government be bailing them out?

  2. I think letting Fannie and Freddie convert some of their foreclosed single-family houses into rentals to get them out of the for-sale inventory is a good temporary solution to the problem.

  3. Stacy Roby

    I agree that lending standards are excessively restrictive. Even my clients with extremely strong credit are experiencing difficulties obtaining financing. What’s even more frustrating is that self employed people who do not qualify because they do not show enough income can’t reduce their interest rate thus reducing their payment. As a small business owner, the extra money could be used to stimulate the economy.

  4. Humberto

    If banks were to get into the rental arena, it would probably work best if they offered lease options or lease to own, where people who paid their rent on time for an established period could become homeowners instead of tenants.. Perhaps some banks have already thought about renting, but just think about all the work that goes behind a rental: Contractors, Realtors, Attorneys, Property Managers, Accountants… so even if they were to do so, many properties will probably not qualify because of all the money and work that takes to make them livable. The good news is that in some areas that were hit really hard…, we see less and less distress properties, especially short sales a great sign for an improving market.

  5. Paula

    I am a small business owner and own several rental properties. Over the last 2 years I have not been able to refinance any of my real estate loans, not even my own home! The appraisal on my primary home has come in too low. I’ve tried redoing my HELOC… and had the same trouble.
    No matter what direction I go to try to free up some of the equity I have in the properties not one bank has said yes.
    It doesn’t matter if you have good credit and have paid every payment on time. The banks treat small business owners like we are scum of the earth. The examine every aspect of our personal business, make us wait over 2 months for an answer and then dismiss us like we are deadbeats.
    Even relationships that I have had with banks for over 10 years have dried up. No one wants to do business with small business owners.
    This is what made America great. Every day ordinary people taking an idea and growing a business for themselves, their families and their communities.
    Maybe the banks will be happy when we are all gone.
    Shame on them for turning their backs on hard-working people who have done nothing wrong but to follow their dream.

  6. We see this too much in Vancouver as well, buyers with good income, ratios, etc., get into a transaction then Wham — some minor technicality in underwriting terminates the transaction. This truly is a huge drag on the recovery in our local market.

  7. I own a bunch of rentals, most upside down. I cannot refinance or get a modification, especially because they are investment properties. I’ve let some go back to the bank because it makes sense for my business. I’m sure that’s the case for investors everywhere.