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2014-07-14 09:49:32
Tight Credit Hampers Recovery as Lenders Fear...

Tight Credit Hampers Recovery as Lenders Fear ‘Considerable Costs’, Fed Report Says

Posted: 12 Jul 2014 04:29 PM PDT

The housing recovery is still hampered by tight credit, a result of stricter loan standards and lenders fearing that “departures” from these new rules could result in “considerable costs”, according to a new report by the Federal Reserve of Boston. 

Single-family home prices have rebounded strongly over the past two years, and the rise in home sales in May offers some optimism, the report sais. But single-family construction and trend sales remain sluggish.

At the same time, originations of mortgages to purchase a home fell in the first quarter to their lowest level since early 2011.

With the onset of the housing crisis, banks and other lenders significantly tightened their criteria for making mortgage loans.

“Most visibly, they stopped making “subprime” loans to households with especially poor credit histories,” the Fed report says. “Households with FICO credit scores below 620 — a score that might be triggered, for example, by being 90 days late on a loan payment — essentially lost any access to mortgage borrowing. And lenders no longer allowed borrowers to take out a ‘piggyback’ second mortgage to make a down payment.”

Both lenders and borrowers have dealt with the tight credit market with the help of the Federal Housing Administration (FHA), which has grown rapidly since 2007. Congress authorized the agency to target a broader set of households in 2009.

In response, FHA increased the maximum loan it would guarantee to $730,000. Single-family purchase mortgages guaranteed by FHA grew from 300,000 in 2006 to 1.1 million in 2010.

During this same time period, originations of all other types of mortgages plunged. Consequently, FHA share of single-family purchase originations jumped from 5 to 44 percent.

Moreover, the FHA, the Federal Housing Finance Agency, the Consumer Financial Protection Bureau, and other government and private organizations continue contributing to a new regulatory framework, which is having the result of lenders getting tougher on a broader range of applicants.

“Lenders fear that departures from the evolving standards will result in considerable costs, including the forced buyback of loans sold to Fannie and Freddie and the rescinding of FHA mortgage guarantees,” the Boston Fed says. “The associated uncertainty has caused lenders to act as if strict interpretations of possible restrictive future standards will apply.”

Read the full report.

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