Duke: Tight Credit May Be to Blame for Slow Recovery

Still-tight credit supply is at fault for anemic demand in the housing market, preventing a full-fledged recovery from exerting itself in home sales, prices, and other indicators, according to one governor on the ""Federal Reserve Board"":http://www.federalreserve.gov/.

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Delivering a ""presentation"":http://www.federalreserve.gov/newsevents/speech/duke20120106a.htm before trade groups in Virginia earlier Friday, Fed governor ""Elizabeth Duke"":http://www.federalreserve.gov/aboutthefed/bios/board/duke.htm faulted underwriting and lending standards, among other market forces, for delaying financial support for homeowners.

""Housing demand and homebuilding continue to be restrained by weak income and sentiment, tight lending standards, and a large overhang of vacant properties,"" she said.

Duke attributed slackened demand and weaker home prices to a combination of ""stricter underwriting, higher fees and interest rates, more stringent documentation requirements, larger required down payments, stricter appraisal standards, and fewer available mortgage products.""

She said these conditions helped heighten credit scores for new prime and Federal Housing Administration mortgage originations, adding that borrowers with less credit access

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have now likely been ""essentially excluded from the mortgage market.""

The Fed governor described tighter standards as some that continue to serve as obstacles to mortgage refinancing options, and said that ""many [borrowers] have still not benefited from the low levels of interest rates"" despite modifications to government programs like the Home Affordable Refinance Program.

She said tight credit conditions persist even when the GSEs and FHA offer lenders a number of opportunities to shield themselves from additional risk.

""Lenders reportedly attribute this hesitancy to concerns about the high cost of servicing in the event of loan delinquency, and to fears that the GSEs could force lenders to repurchase loans if the borrower defaults,"" Duke said.

""Although this inability of the GSEs to ├â┬ó├óÔÇÜ┬¼├ï┼ôput back' loans to lenders helps protect the taxpayers from losses, an open question is whether the costs of the associated contraction in credit availability outweigh the benefits of risk mitigation,"" she said.

Her proposed solution to still-tight credit? Duke suggests empowering Fannie Mae and Freddie Mac to shore up housing finance until structural enhancements can dissolve federal conservatorship and lure private lenders back to market.

""I believe policymakers should at least consider policies that take into account the role the GSEs could play in hastening the healing of the housing market rather than focusing entirely on minimizing losses to the GSEs,"" she said.

""I think it is plausible that a faster recovery in the housing markets could speed, rather than slow, the end of GSE conservatorship,"" she added.