The Credit Box Opens
Since the great depression, housing starts have nearly doubled. More recently, strong investors have been buying properties in distress at a insatiable rate, driven by low house prices and strong rental demand, but as that trend began it’s decline, first time homebuyers have stepped up to fill the void. These shifts have helped stimulate much of the United State’s economic growth. Although mortgage rates are still low (historically speaking) they have risen overall in the past few decades.
The constriction of credit is driven by multiple factors. First, lenders have reassessed how much risk they are willing to take on, often due to the increased cost of servicing distressed borrowers and the legal risks with servicing defaulting loans. Also, rising interest rates coupled with a smaller refinance market has changed the industry’s resources for refinancing. These factors joined with ever changing rules and reforms are keeping lending tight. Therefore, easing mortgage lending standards to help new homebuyers obtain loans is crucial to our economic recovery. Currently, new homebuyers are close to dominating the market; with Texas and Colorado leading the way.
The reasons for the tight credit box are as complex and vast as the solutions, but it seems large lenders will step up to the plate, and be the first to open up the credit box.
According to Fannie Mae’s third-quarter Mortgage Lender Sentiment Survey (which polls senior executives of its lending institution customers), large lenders are more likely to ease their credit standards in the next three months, with an emphasis in non-GSE-eligible and government loans. Fannie Mae suggests this could indicate an effort to boost purchase mortgage before the end of the year.
Doug Duncan, senior vice president and chief economist at Fannie Mae believes they are tapping into this market to “maintain or grow their market share and offset their anticipated slowing mortgage demand as the peak spring/summer selling seasons are coming to an end”.
This trend is already evident, as Citigroup and Bank of America announced they will begin offering mortgages at discounted interest rates to help borrowers with low incomes or subprime-credit histories. Wells Fargo reduced some of its standards in August for high-priced loans.