The ten largest lenders in the nation approved 73% of mortgage loan applications submitted to them in 2010, down from 77% in 2009, according to an analysis by the Wall Street Journal. Loan approvals in California for 2010 were better than the national rate at 76% of total mortgage loan applications.
Lender approval of refinance applications nationally in 2010 were also on the decline. In 2010, 73% of refinance applications were approved, down from 76% the previous year. The results of the study confirm the continuing increase of loan rejections since the banking industry began to correct their boom-time lending policies to reflect the fundamentals required by the Dodd-Frank Wall Street Reform and Consumer Protection Act.
The analysis found the three most common reasons lenders gave for loan denials were a borrower’s:
- insufficient property value for collateral;
- excessive debt-to-income ratios; and
- low credit scores.
Those making a case for stringent banking argue that though lending has indeed been more conservative compared to Millennium Boom levels, it is still nowhere near as tight as it was in the 1980s and 1990s.
On the other hand, industry insiders repeatedly direct attention towards the weak housing market and slow economic recovery. They argue that while aggressive lending practices created the housing bubble and should certainly be scaled back, this is too much. Potential buyers, they explain, must have easier passageway to finance a mortgage and buy a home.
Some lenders have little control over the approval process since Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA) – government sponsored enterprises (GSEs) which together represent 90% of the loans made by these lenders – are holding back on purchasing and guaranteeing mortgages in order to avoid further losses for the federal treasury. (Fannie Mae alone has already received over $100 billion in relief aid.)
A major reason for mortgage loan denial on all levels is GSE and bond market investor pressure on lenders to repurchase loans that go bad. In defense of the rigid policy as of late, the FHA reports only 0.3% of GSE-backed loans issued in 2009 have recorded three consecutive missed payments.
first tuesday take: Lenders are doing homeowners and the economy a favor. (A cue to gasp, pause, then breathe a sigh of relief.) Current anxious but unqualified homebuyers may raise a stink about having a denied loan application in their hands but tighter home mortgage lending standards are better for the long-term stability of the real estate market place.
Brokers and buyer’s agents play a contributing role in this 25% loan rejection rate. They are obviously not counseling and advising their buyers – at least not 25% of them – about their gross income, 31% income to mortgage payment ratios, their FICO scores and the cash value the appraiser is going to place on the property they are purchasing. If brokers and agents cover all of these bases with a buyer, then that buyer will not be one of the 25% rejected, and that 25% figure will turn into a 100%.
As we envision recovery in California, we are not talking about going back to the unsound bubbly conditions of recent years past. Rather, recovery entails a return to long-term, historical trends, or in other words, a return to traditional lending standards, which is what all the loan denials are about. Fundamentals provide a cushion to make the markets less susceptible to financial crises of a degree akin to that which we just experienced. [For more information about what makes a financial crisis, see the July 2011 first tuesday article, The rocky roads: recession and financial crisis.]
Only homebuyers capable of putting down a minimum 20% down payment, with jobs to make mortgage payments and carry the property they purchase are truly qualified to receive home loan financing. This was not a practice in the norm during the Millennium Boom when the Federal Reserve (the Fed) flooded the markets with money and Congress eased lending regulations, allowing mortgage lenders to originate risky and imprudent loans. [For more information on the important real estate fundamentals including the 20% down payment principle, see the June 2011 first tuesday article, The 20% solution: personal savings rates and homeownership.]
After some wrist slapping from legislation and the media, the banks, lenders and GSEs are again learning how to make mortgage loans and are now reinstating past discarded standards in their lending policy manuals. This is a positive step toward establishing healthier habits for American financial institutions. [For more information on past and current American housing policies, see the June 2011 first tuesday article, Subsidizing the American dream.]
It seems we have been here before, that déjà vu of some 80 years ago.
RE: “Tighter Lending Crimps Housing” from the Wall Street Journal