Fed Governor Addresses Capacity Concerns

Capacity limits may be playing a significant role in keeping first-time homebuyers out of the credit market, according to ""Federal Reserve"":http://www.federalreserve.gov/ Governor ""Elizabeth Duke"":http://www.federalreserve.gov/aboutthefed/bios/board/duke.htm.

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Speaking at the Mortgage Bankers Association's ""Mid-Winter Housing Finance Conference"":http://www.midwinterconference.com/2012/default.html, Duke addressed a variety of issues contributing to the currently tight lending environment. One such issue is the influx of refinance applications as interest rates hover near all-time lows--Duke noted that although purchase originations have been subdued, refinancing originations more than doubled from mid-2011 to the end of 2012.

As the ratio of refinance applications to the number of real estate credit employees rises, loans are taking longer to process as the procedure becomes more thorough. Adding [COLUMN_BREAK]

to that, Duke said, is the problem that real estate credit employment has risen relatively slowly in response.

""When capacity constraints are binding, lenders may manage the surge in refinancing demand by holding mortgage rates high relative to lenders' funding costs,"" Duke explained. ""Furthermore, when refinancing demand is high, lenders have less incentive to pursue harder-to-complete or less profitable loan applications. ... It is possible that the abundance of these applications may have had the unintended effect of crowding out borrowers with lower credit scores, whose applications may be more time consuming to process.""

According to Duke, last year's rise in refinance workload ""appears to be associated with a 50 percent decrease in purchase originations among borrowers with credit scores between 620 and 680 and a 15 percent decrease among borrowers with credit scores between 680 and 720."" Purchase loans among borrowers with higher credit scores were affected to only a small degree, she said.

While capacity may remain strained for some time, Duke said the situation ""should start to unwind"" if rates stay at their current levels or rise, in which case the refinancing boom will start to wane. At the same time, growing confidence in the housing and economic recovery may brighten their lenders' outlooks for purchase originations, ""making them more confident in easing standards or increasing capacity.""