Tags: credit | mortgage | recovery | housing

Report: Tight Credit for Mortgages Is Hampering Economic Recovery

By    |   Thursday, 03 October 2013 07:58 AM

Tight credit for mortgages is preventing economic recovery, two economists argue in a new report.

Policymakers have tools to ease credit and promote a housing market rebound needed for an overall recovery - if only they would use them, say Jim Parrot of the Urban Institute and Mark Zandi of Moody's Analytics.

"If left unaddressed, the problem could become a binding constraint with serious consequences for long-term economic growth, particularly as the nation's demographics change and fewer people fit neatly into the current credit box."

Editor’s Note:
Obama Donor Banned This Message (Shocking)

The goal is to find a good balance, not to return to the loose, anything-goes standards of the housing boom era, the economists stress.

Tight credit is most evident in credit scores, they say. The average credit score of home buyers this year is over 750, 50 points higher than the average score and 50 points higher than the average score of home buyers a decade ago, before the housing bubble.

Burned by a wave of defaults, lenders fear loan defaults like never before, notably the costs of servicing bad loans and reputational and legal risks.

Fannie Mae, Freddie Mac and the Federal Housing Administration bear the risk of bad loans they guarantee or insure — in theory. They can put back loans to lenders, forcing them to buy back bad loans, if they find underwriting mistakes.

The agencies have become more aggressive in pursuing put-backs in a way that lenders cannot handle through better underwriting, the economists say. Put-backs may involve disagreements over the lender's judgment calls, changes occurring after the loan underwriting, small mistakes unrelated to the loan approval and inconsistent interpretation of regulation.

As a result, lenders are now unsure of rules they are supposed to follow and have tightened lending standards.

The economists urge policymakers to end that uncertainty by improving clarity.

"The objective needs to be creating and enforcing rules in a way that leads to better underwriting and quality control, not less lending."

New regulations from the Consumer Financial Protection Bureau will make mortgage credit tighter, experts tell MarketWatch. If loans are not "qualified residential mortgages," borrowers have extra legal protections if they default.

"From an industry perspective, most lenders are going to say, 'If I'm going to take on additional risk, I need to be even more careful who I lend to,'" Tom Wind, an executive vice president at EverBank Financial, tells MarketWatch.

Editor’s Note: Obama Donor Banned This Message (Shocking)

Related Stories:

Shiller: Evidence Suggests No Housing Bubble Now, But Maybe in Future

Government Shutdown Seen Threatening Housing Recovery

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Tight credit for mortgages is preventing economic recovery, two economists argue in a new report.
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2013-58-03
Thursday, 03 October 2013 07:58 AM
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