Despite the best efforts of the federal government to allow those with dented and troubled credit to continue having access to mortgage loans, tight credit restrictions are still slowing the national housing recovery, according to a report released by the Federal Reserve Bank of Boston.
While single-family home prices have rebounded strongly over the past two years and the May uptick in sales has generated some guarded optimism, single-family construction and trend sales remain sluggish. Mortgage origination is also at its lowest level since early 2011, according to the Boston Fed.
The Boston Fed's report comes as the Mortgage Bankers Association reported a 0.6 percent increase in its Mortgage Credit Availability Index, putting the index at 115.8. But most leeway is happening in jumbo loans and Federal Housing Administration (FHA) assistance to low-income borrowers, leaving little change in tight regulations among the middle class.
The housing crash led to much tighter lending regulations that were supposed to protect taxpayers from another costly bailout. Subprime loans to borrowers with low credit scores were summarily wiped out, as was the ability to piggyback loans (taking out a second mortgage to make a down payment). Lenders themselves additionally tightened their own lending practices beyond the scope of the new federal mandates.
The Boston Fed checks in quarterly with lenders to see how these regulations are affecting business, and its latest look-see has revealed the same thing it has the past dozen or so times it enquired—since early 2010, there has been almost no loosening in credit to most lenders.
One of the ways lenders and borrowers have dealt with the taut credit market is through FHA, which has grown rapidly since 2007 and, in particular, since Congress authorized the agency to more explicitly target a broader set of households in 2009. To do so, FHA increased the maximum loan it would guarantee to $730,000. Single-family purchase mortgages guaranteed by FHA grew from 300,000 in 2006 to 1.1 million in 2010. During this same time period, originations of all other types of mortgages plunged. Consequently, FHA share of single-family purchase originations jumped from 5 to 44 percent.
The Boston Fed has pinned the slowdown in non-FHA originations on lenders, who it says may simply be gun shy. While a reasonable reaction, the Boston Fed reports that the conservative new environment for borrowers is actually proving counter to the original goals to open the mortgage market under less avaricious conditions.
"Weak income growth, increases in student debt, and rising home prices are each putting downward pressure on purchase demand," the Boston Fed reported. "Clarifying what constitutes approved lending may help to overcome these challenges."