Analysis Blames Slow Recovery on Tight Credit Market

September 17, 2012

High lending standards are preventing a full economic recovery, according to new survey findings and an analysis of historic credit scores and loan performance by the National Association of REALTORS®. The group estimates that the U.S. economy would reap significant benefits if mortgage lending conditions were to return to normal. 

“Sensible lending standards would permit 500,000 to 700,000 additional home sales in the coming year,” said NAR Chief Economist Lawrence Yun.  “The economic activity created through these additional home sales would add 250,000 to 350,000 jobs in related trades and services almost immediately, and without a cost impact.”

This view appears to be shared by real estate professionals as well. According to the REALTORS® Confidence Index, based on more than 3,000 responses by NAR members, there is widespread concern over the tight credit conditions for residential mortgages.  Respondents report that lenders are slow to approve applications, and that banks request information from borrowers that is considered to be excessive. 

Some expressed the belief that lenders are focusing only on loans to individuals with the highest credit scores. The survey found that 53 percent of loans in August went to borrowers with credit scores above 740.  From 2001 to 2004, only 41 percent of loans backed by Fannie Mae went to borrowers with FICO scores above 740, while 43 percent of Freddie Mac-backed loans went to such borrowers. In 2011, about 75 percent of total loans purchased by Fannie Mae and Freddie Mac, which are now a smaller market share, had credit scores of 740 or above. 

Yun said the financial industry has not recognized that the market has turned in the wake of an over-correction in home prices. 

“There is an unnecessarily high level of risk aversion among mortgage lenders and regulators, although many are sitting on large volumes of cash which could go a long way toward speeding our economic recovery. A loosening of the overly restrictive lending standards is very much in order,” he said. 

Yun added that lenders' high aversion to risk was unnecessary because default rates have been abnormally low since 2009.  Fannie Mae default rates have averaged 0.2 percent while Freddie Mac’s averaged 0.1 percent. The association deemed such rates especially notable due to higher-than-usual unemployment levels.

"These findings show we need to return to the sound underwriting standards that existed before the aberrations of the housing boom and bust cycle, and thoroughly re-examine current and impending regulatory rules that may cause excessively tight standards," Yun said.

Source: "Home Sales and Job Creation would Rise with Sensible Lending Standards," National Association of REALTORS® (Sept. 17, 2012)

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