Personal Finance and Investing

A housing correction appears to be underway but don’t be fooled into thinking that lenders would get excited about the possibility of beginning to lend again. In spite of home prices and pending home sales increasing for many of the past several months, most lenders are still treading very cautiously when it comes to new loan approvals and expanding their loan portfolios. There have been eager buyers looking for opportunities to take advantage of home prices while they’re low who have simply been unable to obtain financing. Now that homes are getting more expensive again in most parts of the country, these buyers are running into the same brick walls that they were a year ago. A mortgage is simply not an easy thing to obtain anymore.

In October, the Federal Reserve surveyed lenders from major banks across the country. Their findings were surprising considering all the talk of recovery and the fact that the government has poured billions of dollars into projects aimed at making loans easier to obtain to give the struggling housing market a boost. Here are some of the survey findings.

Lending Standards Remain High: It would seem that with less risk of loans going bad in a recovering housing market, lenders would ease restrictions on who qualifies for a loan. This so far has not been the case, as less than 4% of lenders reported that they had eased qualifying restrictions “somewhat.” In other words, 96% of lenders haven’t loosened their standards. In the survey, 25% of lenders said that they had actually made it harder for customers to get a loan during the most recent quarter. Fannie Mae, the government body that extends home financing to may first-time homebuyers, announced during the quarter that they had increased their minimum credit score requirement from 580 to 620. FHA loans are also likely to require a larger down payment for potential borrowers in the future.

HELOC’s Are Disappearing: If you’re thinking about trying to lock in historically low interest rates with a home equity line of credit, you might not find lenders jumping at the opportunity to make the loan. Half of the banks in the survey reported that they had actually reduced the HELOC’s outstanding during the most recent quarter. Analysts believe that the reduction in outstanding credit lines doesn’t necessarily reflect increasing risk projections for the housing market but is instead being used to offset other potential losses in lender portfolios expected to impact their future results.

Lenders Are Pessimistic: The biggest and most telling realization from the Fed survey is that lenders aren’t nearly as sure about this recovery as many economists and analysts are. Lenders have their own internal models that take factors like unemployment, foreclosures, pending home sales, and many others to develop predictions about the future of loans that they have made. If these models were producing positive results, lenders would be more likely to be loosening credit standards instead of tightening them.

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