The future of expanded credit availability has strong ties to a healthy housing recovery—and that future lies in the hands of private lenders.
The lending pendulum was pulled into careless territory nearly 10 years ago, and since the bust it has swung in the opposite direction. It’s now hovering in an ultra-conservative space where well-off buyers with the highest credit ratings and largest down payments are most likely to get financing, while others with stable employment but modest incomes are missing out on the opportunity to own a home.
Even White House and Federal Reserve policymakers have warned that lending standards are too restrictive and could continue to stifle progress made over the past few years.
Refinancing, which kept the lending world busy in recent years, dropped by 50 percent between December and April, according to the Mortgage Bankers Association. Lenders would benefit by making up for that loss with purchase loans, but first they’d have to relax borrowing requirements. And that would benefit consumers, home sellers and their communities.
In some cases, it appears the lending pendulum is returning to the center—where lenders are starting to vie for the consumers with slightly lower credit scores (in the high 600s and lower 700s) and with smaller down payments.
To remain competitive, more lenders have to tap into a wider customer base. Some recently started lowering required minimum down payments to as little as 3 percent, and they’re allowing borrowers to use gifts from family and friends.
These more reasonable standards should allow lenders to originate more loans and help fuel the ongoing economic recovery. As lenders continue to compete for business, more buyers will be able to enter the marketplace.
A look back to 2001 shows the need for balance. That year, about a quarter of new borrowers had credit scores above 760. Last year, 40 percent of new borrowers had the same credit scores, according to the Wall Street Journal. In 2001, 13 percent of borrowers had scores below 620. And last year, borrowers with those credit scores made up less than 0.2 percent of new mortgages.
Should we expect to see loan standards loosen up to pre-crisis lows? No.
But if they don’t loosen more, they will further challenge the recovery process.
Experts agree that tight lending standards—those that favor investors, the wealthy and borrowers with pristine credit—have significantly suppressed home purchases.
There are 1.2 million “missing” loans for every year that credit is limited, according to a March study by Urban Institute. Its analysis showed a disproportionate effect on African-Americans and Hispanics.
As the market recalibrates, lenders have to focus on the housing market at large, not just those who provide more than 20 percent down with near-perfect credit scores.
Credit availability and competitive lending are obviously the keys to continued recovery in the housing market. As eligibility requirements approach a more moderate threshold, a ripple effect will ensue. More buyers will be approved, and those who own homes will be more motivated to put their homes on the market.
As we start the busiest home-buying season, there are signs that equilibrium is on the horizon. Confidence and activity will follow—slowly and surely.