Even as demand for mortgages declined with the expiration of homebuyer tax credit in the third quarter, a small number of banks tightened standards on both prime and nontraditional mortgage loans, reversing a slight net easing reported in the second quarter.
The Federal Reserve’s quarterly survey of senior loan officers released yesterday provides additional fuel for demands by the National Association of Realtors urging lenders to change their lending policies to make it easier for qualified home buyers can become home owners.
At its board meeting yesterday, the NAR appealed to FHA, Fannie Mae, and Freddie Mac to which it said account for more than 90 percent of the mortgage market, arguing that FHA and GSE underwriting rules eliminate many buyers with credit scores as high as 750, and lenders are imposing credit overlays of their own, restricting the availability of credit.
The most recent tightening of standards on prime mortgage loans was largely accounted for by smaller banks; large banks generally left standards about unchanged. Both large and other banks reported a net tightening of standards on nontraditional mortgage loans. Continuing a pattern seen since the start of the financial crisis, fewer than half of the respondents reported having made such loans. Modest numbers of banks reported weakening demand for both prime and nontraditional mortgage loans to purchase homes.
Lenders began tightening standards for prime as well as non-traditional loans beginning in 2006, reaching a peak in the third quarter and fourth quarters of 2008, when 90 percent of senior loan officers reported to the Federal Reserve that they were planning to tighten lending standards on non-traditional loans and 69 percent planned to tighten standards on prime loans.
Since then, the number of bankers tightening standards has decreased, but virtually all the changes in underwriting standards imposed following the subprime crisis remain in effect. During the second quarter of this year, a small fraction of large banks reported having eased standards on prime residential mortgage loans, a trend that was reversed in the third quarter.
NAR said stricter FHA and GSE underwriting rules eliminate many buyers with credit scores as high as 750, and lenders are imposing credit overlays of their own, restricting the availability of credit.
“Under current practices, many would-be home buyers who could responsibly, affordably become home owners are unable to do so,” said Vicki Cox Golder, NAR President. “NAR wants to ensure that anyone who is able and willing to assume the responsibilities of owning a home should have the opportunity to pursue that dream.”
NAR plans to encourage FHA, the GSEs, lenders and federal regulators to assess their credit policies on a regular basis, and will urge them to re-evaluate their policies regarding which home owners can qualify for loan modifications, short sales, or deeds-in-lieu of foreclosure to help more home owners keep their homes or, when that is not possible, help them begin to rebuild their credit.
In addition, NAR made a series of recommendations to FICO Corp. and lenders to amend certain rules on the utilization of credit and how negative credit scores affect future home purchases, and to change how they report and treat loan modification and payment plans. Other recommendations include making credit scores and credit reports available to borrowers against whom adverse action has been taken, and conducting research on the impact of credit policies on underserved groups.