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What’s making mortgages so hard to get?

by Ethan Handelman, National Housing Conference

Buying a home is uncommonly affordable these days. Indeed, mortgage rates hit 3.84% according to Thursday’s survey from Freddie Mac—the lowest they’ve ever been. Home prices are low, too. So why are housing markets so slow to respond?

Much of the answer is that it’s still very hard to get a mortgage. Mortgage lending has overcorrected from the too-lax standards during the boom, and there’s no sign of relaxation back to more normal underwriting. A survey conducted by the Federal Reserve found that a majority of banks were less likely to lend to lend to people with credit scores of 620, even with a 10% downpayment, than they were in 2006. Some banks were less likely to lend to borrowers with a credit score of 720 and a 10% downpayment. What could change that lending decision? Having a 20% downpayment.

That shows overcaution, to the result that lending is focusing on high income borrowers with accumulated wealth and very clean credit, but leaving out many low- and moderate-income families who could be responsible borrowers and homeowners. Why are banks doing this? The survey suggests a few major reasons:

  • Borrowers having higher costs for or more trouble obtaining mortgage insurance. That’s the lending decision one step removed, in some ways, and also a symptom of our disrupted housing finance system.
  • Put-backs by Fannie Mae and Freddie Mac. The two mortgage entities have stepped up their demands that lenders repurchase loans previously sold to Fannie or Freddie, making lenders very skittish about new lending.
  • Concern about the future direction of housing prices. This is a broadly shared concern, but it shouldn’t necessarily affect borrower qualifications, only the evaluation of the collateral.

There are other factors, certainly, and the survey goes into more detail. To get us further on the road toward a housing recovery, we’ll need to make mortgage credit more broadly available than it is now, and make sure low- and moderate-income families have access to the same safe and efficiently-priced mortgages that higher-income families do.

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