Tight credit is leaving the housing market gasping for air. That's the drum beat from many corners of the real estate industry, which has been complaining loudly that restrictive mortgage-lending standards are a leading reason housing can't seem to climb out of its very deep hole.
Not everyone agrees. Last week in this column, Bankrate.com chief financial analyst Greg McBride voiced the opinion that, yes, standards are tougher these days, but not fatal — he cited a recent Wall Street Journal survey of major lenders showing that roughly three of every four mortgage applications were approved in 2010. Banks need to get themselves in order, and tighter lending standards are part of the process, he said.
Still, the housing industry regards current conditions as unbendingly difficult. Builder magazine, a trade journal, complained of "the absolutely hostile environment for borrowers' access to home mortgage credit." The National Association of Realtors blamed dismal home-sales numbers for June on a spike in sales cancellations that was caused in part by tightening standards.
Michelle Hamecs, assistant vice president for finance at the National Association of Home Builders, and Steve Linville, the trade group's director of single-family finance, talked about housing's lending headaches:
Q: Do you agree that mortgage-lending standards needed to tighten after the excesses seen during the runup to the housing bubble?
Hamecs: We would agree that yes, in part, this is a reaction to underwriters' standards that did get too lax. But we think things have tightened up too much, and they're starting to restrict access to credit for qualified borrowers. Lenders got beaten up for being too loose, so they're tightening down, going to the other extreme.
Linville: Lenders are very concerned about potentially (being forced to buy back loans they sell ) to Fannie Mae and Freddie Mac, so they're being overly careful and overly cautious as they document the loans, adding overlays of requirements on top of Fannie's and Freddie's.
Q: What are the most inflexible conditions, in your view?
Hamecs: Anecdotally, I'd say it's probably credit scores and down-payment requirements. But we're even more concerned about what's ahead, the qualified residential mortgage, or QRM.
Q: Could you explain QRM?
Hamecs: It's a proposed regulation that's part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. As written, the regulation would basically make 20 percent down payments the standard.
The law is for credit-risk retention. It says that for every mortgage that's put into a security, the person who's issuing the security has to retain 5 percent of the potential credit risk so that they have some skin in the game, as it's famously called. There are some exemptions, such as federally backed Veterans Administration loans, Federal Housing Administration loans and Guaranteed Rural Housing Loans. It also exempted qualified residential mortgages, which are those that historically would have a lower risk of default.
But the law didn't go into how QRM should be defined, it left it to six regulatory agencies, and a 20 percent down payment, as well as other requirements, is in the proposed regulation.
The regulators came out with a very narrow definition of a QRM because their theory is, if there are fewer loans that meet the QRM definition, it will increase competition among mortgage issuers for the remaining, non-qualifying loans, and that would bring down the cost.
We disagree. We think it's going to make loans more expensive for consumers because it's going to be more expensive for the securitizer to have to hold a piece of each loan on their books that they can't sell.
The sponsors of the amendment to Dodd-Frank (mandating the QRM concept) have come out and said that their intent was that the QRM should be broadly defined (than the regulators are making it).
Q: Doesn't the Federal Housing Administration, which requires as little as a 3.5 percent down payment for the loans it insures, provide access to housing finance for borrowers who can't come up with 20 percent down? And FHA is exempt from the QRM requirement.
Linville: One of the concerns we have with QRM is that it will push more borrowers into the FHA market, so then we'll have concerns about FHA's capacity to insure so many loans. FHA's share of the market (when standards got tighter) went from something like 3 percent of the market to 30 percent.
Plus, we also understand that FHA is also considering increasing its down payment requirement to 5 percent, pushing more people out of the market.
Q: When might the Washington regulators come to a decision about the QRM standards?
Hamecs: Nobody knows. It's so complicated, and there has been so much pressure brought by groups like us. We're joined with 44 other groups to make the Coalition for Sensible Housing Policy, which has come out in opposition to the proposed definition of the QRM.
Linville: No one is dealing well with the uncertainty. With the QRM and other legislative stuff that's going on, there's a lot of uncertainty that will continue to keep lenders in a more uncertain, conservative stance.