Leery Lenders Delay Housing Recovery

Wary of an uncertain economic climate, new regulatory legislation, and the potential for burdensome capital restrictions, the nation's top lenders financed fewer mortgage loans in 2010 than in 2009 to keep their ledgers in the black ├â┬ó├óÔÇÜ┬¼├óÔé¼┼ô a cumulative pattern that analysts and news reports say hampers housing and, potentially, recovery in the broader economy.

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According to analysis conducted by ""_The Wall Street Journal_"":https://www.wallstreetjournal.com/Gryphon/jsp/retentionController.jsp?page=571, the 10 largest mortgage lenders in the country denied 26.8 percent of loan applications last year, up from 23.5 percent in 2009. In 2010, lenders also declined to finance 19.9 percent of home-purchase applications and 27.2 percent of refinance applications, reflecting increases from 27.2 percent and 24.2 percent, respectively, in 2009.

The ""_Journal_"":https://www.wallstreetjournal.com/Gryphon/jsp/retentionController.jsp?page=571 partly tied the decline in lending volume to caginess on the part of GSEs ""Fannie Mae"":http://www.fanniemae.com/kb/index?page=home and ""Freddie Mac"":http://www.freddiemac.com/ and the ""Federal Housing Administration"":http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/fhahistory, which back the mortgages of nine in 10 loans today. Tighter restrictions for underwriting standards, in turn, greatly influence the loans banks are willing to approve.

Bob Davis, EVP for mortgage markets and public policy at the ""American Bankers Association"":http://www.aba.com/default.htm (ABA), went further by attributing lending lows to the uncertainty felt by banks concerned with ongoing settlements, weak economic recovery, and new regulatory statutes under the Dodd-Frank Act.

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""Banks are restoring their capital positions because of losses they've incurred or because of settlements they've inherited from acquisitions,"" he said. ""When you wonder why banks might be increasing capital, they have to be if they're going to be in business.""

Davis cited the ""Consumer Financial Protection Bureau's"":http://www.consumerfinance.gov/ (CFPB) recently proposed risk-retention rule as one particularly disconcerting for ""ABA's"":http://www.aba.com/default.htm members.

If lenders ""end up with an overly restrictive risk-retention requirement, and if by a number of measures the risk-retention requirement is proposed, it will eliminate├â┬ó├óÔÇÜ┬¼├é┬ª 50-70 percent of mortgages that GSEs are buying,"" potentially exposing banks and other institutions to significantly more risk.

Seeming to agree, Bill Himpler, EVP at the ""American Financial Services Association"":http://www.afsaonline.org/, said industry leaders are ""very concerned that├â┬ó├óÔÇÜ┬¼├é┬ª while we're trying to get the housing market and mortgage credit availability back on [their] feet, the [risk-retention rule] poses a risk by potentially hampering recovery"" in the housing markets.

Himpler cited a 20 percent down payment that will result for borrowers if the ""CFPB"":http://www.consumerfinance.gov/ approves the rule, something he said would roll over onto buyers and sellers as well as loan officers and lenders.

""I don't know too many people selling two-bedroom condos for $100,000 with $20,000 lying around for a down payment,"" he said.

Referencing underwriting standards, Davis likened the push by markets, legislators, and regulators to over-correct and keep risky loans to a minimum to a pendulum.

""We're still at the pendulum up in one arc of its swing, but there has to be a balance,"" he said. ""What's the right level of security that capital brings and what's overcapitalization? That will be key going forward"" for banks and lending institutions.