Thaw in Mortgage Credit Standards Could Speed Housing Recovery
After years of ultra-tight mortgage lending standards, a new report from the Federal Reserve indicates that banks may be easing their requirements for home-buyers. If that occurrence should become a trend, the stalled U.S. housing market recovery could make headway again by the end of the year.
"The July survey results showed a continued easing of lending standards and terms for many types of loan categories, and a broad-based pickup in loan demand," wrote the Fed in its senior loan officer survey.
Almost a quarter of lenders reported that they had eased credit standards for prime mortgages during the previous three months, the largest percentage in over seven years, since the start of the mortgage meltdown. Only a small sliver - six percent - of lenders tightened their standards in the latest quarter.
The decision to loosen lending requirements seems to have been fueled by increased competition from other lenders as demand rose. Half of the banks surveyed in July said they saw stronger demand for prime mortgage in the past three months, the first increase in over a year.
Undoubtedly the dramatic upsurge in economic activity in the second quarter also played into loosening credit standards, as GDP grew at a surprising four percent rate. Although a much greater pace than expected, economists believe that the new figure reflects spending and business contracts that were deferred due to the winter's unseasonably harsh conditions in many parts of the country. Yet if that new pace continues, it could lead to more job creation and homebuilding.
Mortgage credit dried up almost overnight back in 2008 when the financial crisis revealed the extent of the housing market's problems. Banks contracted their lending in order to shore up losses and prevent future catastrophes, but the effect has been a much slower pace in the housing market recovery.
Last year, however, things started to pick up with home prices jumping and home sales making their largest gains in years. Yet when the Fed reacted to the improved market conditions by hinting it was ready to pull back on its mortgage-bond stimulus program, interest rates shot up and demand tanked again until just the past few months.
And although the latest Fed survey is a good start for homebuyers, there is still ground to be covered when it comes to making mortgages accessible to the general population. "It is difficult for any homeowner who doesn't have pristine credit these days to get a mortgage," said Fed Chair Janet Yellen at a press conference in June. And after the mortgage meltdown, a great number of former homeowners have less-than-perfect credit as they deal with the consequences of foreclosures and short sales.
It will likely take a combination of looser lender standards, increased inventory and a more secure job market before the housing market starts to see sustainable recovery. Hopefully the indications of the past few months are a sign that that recipe for success is already brewing.