Since the peak of home loan availability in 2007, U.S. mortgage credit has contracted about 13 percent.
During most economic recoveries, mortgage credit begins to grow again four years after its peak – but not this time around.
Despite a monetary policy by the Federal Reserve that has helped keep mortgage rates at record lows, many lending institutions have tightened underwriting conditions “dramatically, relative to the pre-recession period,” said Fed Chief Ben Bernanke.
In a speech Friday to a group of homebuilders, Bernanke outlined reasons why obtaining mortgage credit has been a challenge for not only first-time homebuyers but also creditworthy, repeat borrowers.
Bernanke said that some tightening is appropriate to protect consumers and ensure lenders’ safety and soundness. But current lending practices appear to impose obstacles that are “limiting or preventing lending” even to creditworthy households.
For example, mortgage originators are reluctant to extend credit to some potential borrowers who could meet the underwriting standards set by the government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac. The two taxpayer-subsidized companies finance about half of all U.S. mortgages.
“Indeed, fewer than half of lenders are offering mortgages to borrowers with a FICO score of 620 and a down payment of 10 percent, even though such loans could be within the GSE purchase parameters,” Bernanke said.
A number of possibilities could explain this reluctance to lend, according to Bernanke:
- Borrowers may not be able to obtain private mortgage insurance required by the Fannie Mae and Freddie Mac. The weakened finances of private mortgage insurers could be damping mortgage credit availability for some potential borrowers.
- Lenders may be concerned about high servicing costs if mortgages become delinquent.
- Mortgage originators are concerned about so-called “representations and warranties,” which are contractual commitments by an originator concerning the quality of the loan. These contracts were designed to protect the Fannie and Freddie or other purchasers of loans, but originators appear uncertain about how they will be enforced and have been very cautious about making loans that could be viewed as less than perfect from an underwriting perspective.
Another reason for tight lending standards is that private-label mortgage securitizations have virtually disappeared, Bernanke said.
Lenders are discouraged from originating loans to some borrowers who may be creditworthy, but may not precisely fit the criteria of the Fannie and Freddie or the Federal Housing Administration (FHA).
Bernanke concedes that tight mortgage credit cannot be solved easily or quickly.
The Federal Reserve continues to encourage lenders to find ways to maintain prudent lending standards while serving creditworthy borrowers.
But the continued uncertainty surrounding the future of Fannie ad Freddie, and the and the likely continued absence of a private-label market – combined with the cautious attitudes by lenders – “are all barriers to rapid normalization of the flow of mortgage credit,” Bernanke said.