Home Sales and
Job Creation would Rise with Sensible Lending Standards
September 17, 2012
New survey findings, combined with an
analysis of historic credit scores and loan performance, show home sales could
be notably higher by returning to reasonably safe and sound lending standards,
which also would create new jobs, according to the National Association of Realtors®.
Lawrence Yun, NAR chief
economist, said there would be enormous benefits to the U.S. economy if
mortgage lending conditions return to normal. “Sensible lending standards would
permit 500,000 to 700,000 additional home sales in the coming year,” he said.
“The economic activity created through these additional home sales would add
250,000 to 350,000 jobs in related trades and services almost immediately, and
without a cost impact.”
A monthly survey* of Realtors® shows
widespread concern over unreasonably tight credit conditions for residential
mortgages. Respondents indicate that tight conditions are continuing, lenders
are taking too long in approving applications, and that the information lenders
require from borrowers is excessive. Some respondents expressed frustration
that lenders appear to be focusing only on loans to individuals with the
highest credit scores.
Even though profits in the financial
industry have climbed back strongly to pre-recession levels, lending standards
still remain unreasonably tight.
Yun said all it takes is a willingness to
recognize that market conditions have turned in the wake of an over-correction
in home prices, with all of the price measures now showing sustained gains.
“There is an unnecessarily high level of risk aversion among mortgage lenders
and regulators, although many are sitting on large volumes of cash which could
go a long way toward speeding our economic recovery. A loosening of the overly
restrictive lending standards is very much in order,” he said.
Respondents to the NAR survey
report that 53 percent of loans in August went to borrowers with credit scores
above 740. In comparison, only 41 percent of loans backed by Fannie Mae had
FICO scores above 740 during the 2001 to 2004 time period, while 43 percent of
Freddie Mac-backed loans were above 740.
In 2011, about 75 percent of total loans
purchased by Fannie Mae and Freddie Mac, which are now a smaller market share,
had credit scores of 740 or above.
There is a similar pattern for FHA loans.
The Office of the Comptroller of the Currency has defined a prime loan as
having a FICO score of 660 and above. However, the average FICO score for
denied applications on FHA loans was 669 in May of this year, well above the
656 average for loans actually originated in 2001.
Loan performance over the past decade
shows the 12-month default rate averaged just under 0.4 percent of mortgages in
2002 and 2003, which is considered normal. Twelve-month default rates peaked in
2007 at 3.0 percent for Fannie Mae loans and 2.5 percent for Freddie Mac loans,
clearly showing the devastating impact of risky mortgages.
Yun said home buyers in recent years have
been highly successful. Since 2009, the 12-month default rates have been
abnormally low. Fannie Mae default rates have averaged 0.2 percent while
Freddie Mac’s averaged 0.1 percent, which are notable given higher unemployment
in the timeframe.
Under normal conditions, existing-home
sales should be in the range of 5.0 to 5.5 million. “Sales this year are
projected to rise 8 to 10 percent. Although welcoming, this still represents a
sub-par performance of about 4.6 million sales,” Yun said. “These findings show
we need to return to the sound underwriting standards that existed before the
aberrations of the housing boom and bust cycle, and thoroughly re-examine
current and impending regulatory rules that may cause excessively tight