Anything But Normal

In "Lack of Lending to Creditworthy Borrowers Restricting Housing: Bernanke," HousingWire details remarks from the Fed Chairman on the state of the U.S. mortgage finance market.

Mortgage originators who are reluctant to extend credit to potential borrowers who meet underwriting standards set by Fannie Mae and Freddie Mac are hindering the nation's economic turnaround.

Fed Chairman Ben Bernanke, speaking Friday at the International Builders Show in Orlando, Fla., said the wave of creditworthy households that are finding it difficult to obtain mortgage credit or to refinance is resulting in actions taken by the Federal Reserve — such as lowering interest rates to record lows — is helping to prevent a boost to the housing industry.

Fewer than half of lenders are offering mortgages to borrowers with a FICO score of less than 620 and a down payment of 10%, even though such loans are within the government-sponsored enterprises' purchase parameters.

Bernanke referrenced a number of possibilities that could explain the reluctance.

He said that because borrowers are unable to obtain private mortgage insurance required by the GSEs, the weakened finances of private mortgage insurers could be damping mortgage credit availability for some potential borrowers. In other cases, lenders may be concerned about high servicing costs if mortgages become delinquent.

Another set of concerns relates to representations and warranties, which are contractual commitments by an originator concerning the quality of the loan.

The contracts are designed to protect the GSEs or other purchasers of loans, but originators appear uncertain about how they will be enforced going forward and thus have been very cautious about making loans that could be viewed as less than perfect from an underwriting perspective.

If Mr. Bernanke's explanations are correct, that would suggest a key part of the U.S. financial system remains broken, putting paid to the notion set forth by Treasury Secretary Timothy Geithner (and others) that things are returning to normal.

Then again, there could be another explanation. Since interest rates represent the price of money and mortgage rates are near all-time lows, wouldn't that indicate that the supply of loanable funds, including mortgages, far exceeds the demand? Based on the laws of economics -- which I'm sure Mr. Bernanke is well aware of -- wouldn't that imply that qualified borrowers should have no problem getting a loan?

Unless, of course, you have a situation akin to that which exists in dysfunctional third world countries, where the "official" rates tend to be far different than those found in the shadow, or "black," economy. That, too, would indicate that current conditions are anything but normal (if history is any guide). It also suggests that that those who are relying on official statistics to assess the health of the economy may be making a serious mistake.

Either way, it's hard to see how the current situation could be seen in anything other than a negative light, no matter how hard you spin it.

Comments

[Blissex]

«the wave of creditworthy households that are finding it difficult to obtain mortgage credit or to refinance [ ... ] Fewer than half of lenders are offering mortgages to borrowers with a FICO score of less than 620 and a down payment of 10%»

10% leverage is well speculative, and a FICO score of 620 is nearly subprime, and anyhow FICO scores are unreliable.

In any case I suppose that Chairman Bernanke is dissembling, because he probably knows well two things:

* Mortgages are effectively secured only by the value of the collateral even in "recourse" states, and borrower creditworthiness, especially at the more speculative range, is not worth much.

* Most large banks are insolvent, and are slowly rebuilding their capital via Fed provided profit channels (massive spreads), and don't want to slow down their recapitalization by low-profit lending on dubious collateral like houses.

[Bam_Man]

What most people are failing to realize is that we are witnessing "the end of credit". Private capital wants nothing whatsoever to do with the US mortgage market and deadbeat homeowners who think making mortgage payments is "optional" (ie. only if the value of the house is rising at a fast enough pace so that it can be used as an ATM) Other credit markets will soon follow, if they are not already. In the future, credit will be offered to consumers only by the Federal government, which is essentially the case today with mortgage finance.

[Rocky]

PMI Mortgage Insurance Co. isn't writing any more policies for anyone. The company is bankrupt and is in runoff mode. Lenders who are the beneficiaries of PMI policies are being paid at a reduced rate (50%?) on their claims. I suspect the remaining companies in the mortgage insurance business are on life support. I guess the next shoe to drop will be the FHA insurance program which only requires a 3.5% down payment according to its current web site. Washington bailouts aren't over yet.

[roger]

Would somebody explain what is NORMAL,
I have been around for 87 years and I
still don't know the meaning of the word.

[Banana messenger]

@Rocky...it seems everyone is in runoff mode?

MF Global: Francine McKenna of re: The Auditors Gives a Plausible Explanation

http://jessescrossroadscafe.blogspot.com/2012/02/mf-global-francine-mckenna-of-re.html

[John S]

I'd simply ask who would be so foolish to take on a mortgage when job security is nil and replacement jobs with anything less than a 75% pay cut nonexistent? I still hear about "planning for retirement," but my horizon is survival for the next 6 months.

[eugene]

Would you put your money in a fund you couldn't get out of at a rate of 3.25% for 30 yrs? Not me.

[SurvivalAndProsperity.com]

@roger- A wise British crooner likes to sing that "there is no such thing in life as normal." Makes perfect sense to me.

[Doable Finance]

The end of credit may have arrived, brother.