Are Lending Standards Too Tight?

Will you be able to get a loan for your new Utah home?

Joel Carsonby Joel Carson

Mortgage repayment schedule

Will you qualify for a home loan?

Yeah, okay – it’s prudent to give home loans only to those who can (and will) repay them. It’s also reasonable to look at our recent financial crisis and agree mortgage standards became too lax for our nation’s economic health. But, is it healthy for the U.S. economy to deny credit to worthy would-be buyers due to new excruciatingly tight loan standards? The National Association of Realtors (NAR) is sending a message to the country’s financial gurus that sounds a lot like, “Enough is enough.”

Want to buy a new Salt Lake City home? Realtors are becoming increasingly concerned that you (and thousands of other Utah home shoppers) will never get the opportunity if lending standards don’t relax.

According to a Sept. 17 report issued by NAR, “New survey findings, combined with an analysis of historic credit scores and loan performance, show home sales could be notably higher by returning to reasonably safe and sound lending standards, which also would create new jobs.”

I’m a strong advocate for financial responsibility. But numbers don’t lie. NAR reports that “sensible lending standards” would permit 500,000 to 700,000 more home sales within the next year. How great would that be for the Utah home market and the entire United States economy? Balance is always crucial. Perhaps the pendulum has fallen a little too far in the opposite direction of the situation that put us into crisis in the first place. Let’s bring it back to a center point.

“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,” NAR’s Chief Economist Lawrence Yun said.

Monthly survey results of Realtors shows those in the real estate industry are concerned about unreasonable credit conditions for residential mortgages. Here are just a few of the problems created by extreme requirements based on survey results:

  • lenders are taking too long to approving applications
  • borrower information requirements are excessive
  • lenders appear to be focusing only on loans to individuals with the highest credit scores
  • financial industry profits are rising and lending standards have not relaxed

“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,” Yun said.

Respondents to the NAR survey reported the following:

  • 53 percent of loans in August went to borrowers with credit scores above 740
  • 41 percent of loans backed by Fannie Mae had FICO scores above 740 during 2001 to 2004
  • 43 percent of Freddie Mac-backed loans were above 740 during 2001 to 2004
  • In 2011, about 75 percent of total loans purchased by Fannie Mae and Freddie Mac, had credit scores of 740 or above

Now, this is definitely a great argument for managing credit responsibly; however life happens and the economic crisis happened to most of us. How about a little slack for good people who have experienced a bad situation?

“There is a similar pattern for FHA loans. The Office of the Comptroller of the Currency has defined a prime loan as having a FICO score of 660 and above.  However, the average FICO score for denied applications on FHA loans was 669 in May of this year, well above the 656 average for loans actually originated in 2001,” NAR reported.

Loan performance over the past decade shows the 12-month default rate averaged just under 0.4 percent of mortgages in 2002 and 2003, which is pretty normal.  Twelve-month default rates peaked in 2007 at 3.0 percent for Fannie Mae loans and 2.5 percent for Freddie Mac loans. It’s safe to say risky mortgages had a profound negative impact on individuals and our economy.

Lesson learned?

Since 2009, the 12-month default rates have been abnormally low.  Fannie Mae default rates have averaged 0.2 percent while Freddie Mac’s averaged 0.1 percent (this in the face of a painful unemployment rate).

Here’s to hoping excessively tight standards relax for the good of home buyers, home sellers and everyone in the mortgage industry.

“ … 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.

If you are looking for a Salt Lake home for sale, or a home anywhere in Utah, rely on Utah Real Estate for help! Call me at 801-673-3333 and I’ll walk you through the entire home-buying process. You can shop for Utah homes right now online at www.allutahhomes.com.

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