Fed governor suggests tight underwriting is stalling recovery
Federal Reserve Board Governor Elizabeth Duke says tighter underwriting in the lending space is stalling a meaningful housing recovery and impeding overall economic growth.
She also believes that while controversial, the government-sponsored enterprises may be required to play a larger role in the housing recovery until a safe hand-off to the private market can occur. She made her comments during a speech Friday in Richmond, Va., before the Virginia Bankers Association and the Virginia Chamber of Commerce.
Duke says creditworthy borrowers are unable to secure mortgages at a time when interest rates are low and falling home prices are doing little to stimulate demand.
"Some of this tightening is appropriate, as mortgage lending standards were lax, at best, in the years before the peak in house prices," Duke said. "However, the extraordinarily tight standards that currently prevail reflect, in part, new obstacles that inhibit lending even to creditworthy borrowers. These tight standards can take many forms, including stricter underwriting, higher fees and interest rates, more stringent documentation requirements, larger required down payments, stricter appraisal standards, and fewer available mortgage products."
Duke cites the latest credit score data from the Federal Housing Administration, which shows credit scores on newly originated prime loans well above 760 the past couple of years, compared to 720 back in 2000. FHA credit scores are now closer to 700, which compares to an average score of 650 a decade ago, according to FHA data cited by Duke.
Duke says low or negative equity in homes is another barrier to refinancing, making it impossible for creditworthy borrowers to obtain traditional refinancing.
She suggests additional intervention may be needed to influence a meaningful housing recovery and advocates for a future housing market that woos private capital by ensuring the appropriate structure and levels of transparency are in place.
Duke says Fed data shows less than half of mortgage lenders are offering purchase applications to borrowers who have credit metrics in the lower range of GSE-purchase parameters. She says lenders are hesitating over worries they could end up paying higher mortgage servicing costs or repurchasing defaulted GSE-guaranteed loans.
"Given the severity of problems with supply and demand in the housing market, it is unlikely that any single policy solution will provide the full answer, but a number of different policies each have the potential to yield incremental improvement in housing and economic recovery," Duke said.
Duke says Fannie Mae and Freddie Mac may need to play a temporary role in the recovery, despite the unpopularity of the GSEs and the desire for policymakers to quickly move the mortgage finance space to a private-market model.
"In the short term, however, I believe policymakers should at least consider policies that take into account the role the GSEs could play in hastening the healing of the housing market rather than focusing entirely on minimizing losses to the GSEs. In the end, breaking the current logjam created by large numbers of loans severely past due or in foreclosure and high levels of distressed sales should help reduce losses to the GSEs by breaking the downward cycle in prices. And, I think it is plausible that a faster recovery in the housing markets could speed, rather than slow, the end of GSE conservatorship," Duke said.
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