Home Sales and Job Creation Would Rise with Sensible Lending Standards
September 21, 2012
Tips & Trends
From Rory S. Coakley on some of the latest real estate news and happenings.
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®.
“Sensible lending standards would permit 500,000 to 700,000 additional home sales in the coming year,” Lawrence Yun, NAR chief economist, said. He believes there would be enormous benefits to the U.S. economy if mortgage lending conditions return to normal. “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 (based on over 3,000 member responses) 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 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 standards.”
Source: National Association of Realtors®, realtor.org
If you would like to suggest a topic for inclusion in one of our future email newsletters, contact us today! We look forward to hearing from you.
Rory S. Coakley
Coakley Realty, Inc.
20 Courthouse Square, Suite 107
Rockville, MD 20850
FIND THE PROPERTY YOU NEED.PROPERTY SEARCH
CONTACT US TODAY
Featured Real Estate Listings
Commercial 841 SLIGO AVE,
SILVER SPRING, MD 20910
Rare opportunity to buy and develop in the downtown Silver Spring area. This two story building is currently for sale or for lease. The property consists of a 13,650 SF office building situated on 25,500 SF lot. Currently zoned CR this property offers commercial and residential development opportunities.VIEW LISTING
Residential 9636 BEMAN WOODS WAY,
POTOMAC, MD 20854
SPECTACULAR light filled PARDOE BUILT end unit town home with amazing views and elevator! This 4 level home features gourmet kitchen, butler's pantry, formal dining room, family room, large master suite & 4th floor guest suite/entertaining room complete with roof top deck overlooking manicured lawn. The spacious family room with sunken study opens to private patio and walkway.VIEW LISTING
Residential 8421 CRIMSON LEAF COURT,
POTOMAC, MD 20854
Set on a stunning lot in the beautiful Avenel neighborhood, this three-story house is the perfect place to call home. Want to learn more about our featured listing in Potomac? Call 301-637-0966 to speak with an expert at Coakley Realty or take a virtual tour and see it for yourself!VIEW LISTING