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Bernanke: Loan Standards Easing

One of the main questions hanging over the Federal Reserve’s plan to buy up to $40 billion a month in mortgage-backed securities (MBS) to help spur the housing market is whether continuing tight underwriting requirements will offset any positive impact the effort will have on lowering mortgage interest rates.

NAR Chief Economist Lawrence Yun and other analysts have said that interest rates, already at historical lows, don’t need to come down further to spur home buying. What needs to happen instead is a change in lenders’ underwriting policies. Since the downturn, lenders have been imposing underwriting restrictions on borrowers that go above and beyond what Fannie Mae, Freddie Mac, and FHA require for loans. For example, borrowers in some cases need to have a credit score 100 points higher than what Fannie, Freddie, or FHA require.

These restrictions, or overlays as they’re sometimes called, on federally backed loans are crucial, because Fannie, Freddie, and FHA comprise so much of the mortgage lending market today. Lenders say they need these higher standards to ensure they don’t make loans on which borrowers subsequently default and then face having to take them back if Fannie, Freddie, or FHA say the loan violated the “representations and warranties” the lender made when they originated the loans.

As Yun said in his monthly press conference yesterday, to release August existing-home sales figures, despite improvement in home sales and prices, these standards are keeping otherwise creditworthy households from getting financing, which could lead to wide and troubling disparities in home ownership rates down the road. “The tight underwriting standards are not a trifle matter,” he said. They’re “limiting who can become home owners and setting the stage for possible highly unequal wealth distribution in five years, because who will be getting [home price] appreciation over the next five years? They’re limiting the number of people in the middle who can become home owners.”

Federal Reserve Chairman Ben Bernanke, at a press conference he held last week to announce the MBS purchase plan, known as QE3, (for “quantitative easing 3, because it’s the third such measure the Fed has taken since the downturn), said these tight underwriting standards are in fact easing. “As house prices have begun to rise, as the economy has gotten a little stronger, lending standards have eased just a bit,” he said. “There have also been other changes which are useful. I note for example that the FHFA (Federal Housing Finance Agency) and the GSEs (Fannie and Freddie) have recently changed their policy on put-backs, so that banks will have more certainty under what conditions a mortgage will be put back to them if it defaults. So, there are a number of things in train that will make the mortgage market a little bit more open. That is one factor actually that could make our policy more effective, rather than less effective over time. If more people have access to more credit, more people will have access to the low rates we’re providing.”

Other than the policy clarification on put-backs, also known as loan repurchases or loan buy-backs, Bernanke didn’t specify what those eased lending standards are. And, whatever they are, they don’t appear to be trickling down to many real estate practitioners on the ground. NAR just last week released survey findings that suggest tight standards continue to be a problem. In one of the findings, in about 75 percent of loans to Fannie and Freddie last year, borrowers had credit scores of 740 or above, compared to just 40 percent of borrowers between 2001 and 2004 who did so. The years 2001 to 2004 are considered stable and healthy, before the housing boom. The difference in credit scores suggests up to 700,000 more loans could have been made last year had that the tight restrictions not been in place.

”Financial institutions appear to be focusing on making loans only to individuals with the highest levels of credit scores,” Jed Smith, NAR manager of quantitative analysis, says in his anlaysis of the survey findings.

All this is just another way of saying, as many of the reporters at Chairman Bernanke’s press conference last week were saying (see first video), that the MBS purchase plan might be all the Fed can do, given it’s mandate to focus on monetary policy (matters affecting the supply of money in the economy), but it misses the point. The problem is in lenders’ underwriting policies. And interest rates that go lower than even today’s historically low rates seem unlikely to have much impact on those.

In the first video above, Bernanke makes some key housing market points, including about easing loan standards, as he talks about the Fed’s MBS purchase plan. In the second video, Yun talks about the continuing tight underwriting standards.

Robert Freedman

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

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Comments
  1. Standards easing… please…

    FHA all you need is a
    1.620 Fico

    2.3.5% down payment

    3.Verified Income to show capacity

    Get the economy going, jobs, incomes and a lot saving for a down payment is the best way to solve this problem

  2. Anne Meczywor

    With unrealistically high scores required, really good buyers are unable to secure financing. If good buyers can’t get financing, then the buyer pool shrinks, demand goes down, and prices stagnate. We now have lots of active, good buyers out house hunting. No one wants a return to the loose standards that helped to fuel the housing crisis, but requiring more than is reasonable IS the thing holding us back now that the economy is showing consistent signs of recovery. Once the housing market gets more firmly on track, creating two jobs for every home sold, the entire economic recovery will gain additional forward momentum.

  3. NOAH

    Here we go again! Loosening lending standards so Realtors can sell and buy more homes! No mention about the Banks withholding inventory intentionally drumming up demand and competition bidding to artificially raise prices!

    Sure signs we are in deeper than anyone really admits!

  4. The credit scores are not just the problem …The underwriters are asking for the clients first born child’s birth certificate with the foot print on it…a copy won’t do.. What they are asking to verify is ridiculous ….Example..u take money out of a Merrill Lynch account they want to see the move order…the deposit the new check front and back after it has cleared…then right before you close they want the missing days..A lot of times the banks have not even produced them yet..It is a full time job to collect all the information that is totally unnecessary ….especially today where both parties have full time jobs …children….etc. I have seen many people pull out of deals do to the requests…so unnecessary! The bad loans r over the houses going into default now are because there are no good paying jobs out there for those that have been laid off from a job…$7.50 an hour from Walmart… part time only to skirt benefits… isn’t going to cut it!

  5. Lets help the self employed…lot of credit worthy individuals who have high credit scores, savings, never missed payments, no SS or foreclosure history such as myself. I am not saying we need to go back to full stated income loans but maybe going back farther in time to review credit history, income etc for the self employed. I have been a small business owner for most of my adult life..owned multiple investment properties at one time which were bought with stated income loans and never once missed a payment!!! My husband and I have relocated to a new area and no longer own property and have to rent because we now cannot qualify for loan. We are missing out on the low interest rates and a chance to own again.

  6. Jan

    I agree with Patti! What about helping the self-employed! The small business are a major back bone in this country! I bought all my properties with stated income loans (the kind where you had to prove deposits and assets, etc, not the bad “lyers loan” where you proved nothing) and now I cannot take advantage of refinancing with the lower rates or buy anymore properties because these loans dont exist for us anymore! I have never missed a payment and I have a very high credit score! What about us! We need loans for the self-employed to come back. Small business can be more stable than the folks who are employed and are vulnerable to getting layed off anyday! Small business owners work hard to keep their business going because they have a vested interest in its success! Bring back the loans for this backbone of America!

  7. Andrea

    As a Realtor, I very much disagree with and dislike Mr. Yun’s statement of unequal wealth distribution. We cannot lower standards again just so that nobody feels left out. We do not need lenders or the government promoting or influencing the distribution of wealth.
    In my practice, I see way too many first time home buyers that are complaining about having to put even $500 in escrow, mostly because they don’t have an extra $500. They are then asking for seller concessions of up to 6% to pay for their closing cost etc. If you can’t afford to pay your closing cost and if $500 escrow mean your kids won’t get new shoes, maybe it’s not yet time to buy a home. Maybe it means to wait a little longer, put some money aside and improve that credit score.
    Home ownership is not a right!

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