Recent testimony from the chairman of the Federal Reserve Board highlights a serious problem that may be hindering the country’s economic recovery: in some cases, creditworthy consumers who want to enter the housing market are finding it hard.
Fed chairman Ben Bernanke, making his twice-yearly testimony before Congress, said that tight mortgage standards are hampering the housing recovery and, consequently, the improvement of the economy on the whole, according to a report from the Washington Post. In fact, mortgage lending qualifications are still so high that many consumers who would be otherwise capable of getting different lines of credit are still being denied.
“The extraordinarily tight standards that currently prevail reflect, in part, obstacles that limit or prevent lending to creditworthy borrowers,” a recent Fed report on the housing market said, according to the newspaper. “Less than half of lenders are offering mortgages to borrowers with a FICO score of 620 and a down payment of 10 percent – even though these loans are within the GSE purchase parameters.”
For their part, though, it’s easy to understand why lenders remain cautious about mortgage lending, even to prime consumers, the report said. The economy is still vulnerable to another downturn and credit markets are still generally tight, but perhaps the largest concern is that there is still significant fear in the lending industry about delinquencies, which are costly to service and even more expensive to buy back in the event of an eventual default.
Fannie Mae, one of the nation’s two government-controlled mortgage-backing giants, says that its standards for underwriting new loans and attempts to recover money from old ones are related to attempting to reduce losses realized during the recession, the report said. Bank of America, similarly, says that mortgage lending standards were probably not tight enough to begin with, and the current standards are a reflection of banks becoming more realistic.
Millions of Americans fell behind on their mortgage during the recent recession and many were hit with foreclosure as a result, and many say this had to do with banks extending mortgages to consumers who simply could not afford them. When the housing bubble burst, it left financial institutions with billions of dollars worth of toxic assets, which may help to explain why they’re more cautious about extending credit these days, even as economic conditions improve.