Mortgage originators who are reluctant to extend credit to potential borrowers who meet underwriting standards set by Fannie Mae and Freddie Mac are hindering the nation's economic turnaround.
Fed Chairman Ben Bernanke, speaking Friday at the International Builders Show in Orlando, Fla., said the wave of creditworthy households that are finding it difficult to obtain mortgage credit or to refinance is resulting in actions taken by the Federal Reserve — such as lowering interest rates to record lows — is helping to prevent a boost to the housing industry.
Fewer than half of lenders are offering mortgages to borrowers with a FICO score of less than 620 and a down payment of 10%, even though such loans are within the government-sponsored enterprises' purchase parameters.
Bernanke referrenced a number of possibilities that could explain the reluctance.
He said that because borrowers are unable to obtain private mortgage insurance required by the GSEs, the weakened finances of private mortgage insurers could be damping mortgage credit availability for some potential borrowers. In other cases, lenders may be concerned about high servicing costs if mortgages become delinquent.
Another set of concerns relates to representations and warranties, which are contractual commitments by an originator concerning the quality of the loan.
The contracts are designed to protect the GSEs or other purchasers of loans, but originators appear uncertain about how they will be enforced going forward and thus have been very cautious about making loans that could be viewed as less than perfect from an underwriting perspective.
"Learning from our experience with securitizations over the past decade, lenders and regulators alike should look carefully at rules and practices that may unduly diminish the origination of prudently underwritten mortgages," Bernanke said.
He also examined the disproportionate impact of tightening credit condition on first-time homebuyers, noting that lending to them has dropped precipitously, even in parts of the country where unemployment rates and housing conditions are better than the national average.
"Indeed, the propensity of younger households — headed by adults aged 29 to 34 — to take out their first mortgage has been much lower recently than it was 10 years ago, a period well before the most recent run-up in home prices," he added.
First-time homebuyers are typically an important source of incremental housing demand, so their smaller presence in the market affects house prices and construction. The lack of demand from first-time homebuyers may prevent current homeowners from moving up to larger homes, for example, to accommodate growing families.
The problem of tight mortgage credit will not be solved easily or quickly.
"The Federal Reserve, in its supervisory capacity, continues to encourage lenders to find ways to maintain prudent lending standards while serving creditworthy borrowers," Bernanke said.
"But the slow recovery of the housing market and the economy, continued uncertainty surrounding the future of the GSEs and the regulatory environment for mortgage lending, the likely continued absence of a private-label market and more cautious attitudes by lenders are all barriers to rapid normalization of the flow of mortgage credit," he said.