Are Lending Standards Loosening?

Celia Chen, an economist for Moody’s Analytics, recently reported on her projections regarding mortgage standards throughout 2013.

“The housing recovery began in earnest in 2012, despite constraints placed by a still-tight mortgage lending environment. This year promises improvements as the drivers of tough credit standards reverse.

First, consumer credit quality is improving, which will help increase the number of creditworthy borrowers. Second, policymakers, regulators and courts are ironing out the legal and regulatory issues that cast a pall of uncertainty over the mortgage industry. Combined with mortgage interest rates that will remain low, mortgage credit will be more accessible to households this year, although still not back to normal. Nonetheless, a slight opening of the credit spigot is a positive for the housing outlook.”

She warns that normal credit standards will not return for some time as new QR and QRM rules are determined.

“On the supply side, easy credit is still a long way off as lenders loosen incrementally from very high standards: The share of loans originated for borrowers with the highest credit score has remained large, averaging 82% in the last two years, compared with 50% in 2005 and 2006. New rules issued by the Consumer Finance Protection Bureau in January keep mortgage standards high and credit tight, as lenders will be required to fully document every borrower’s income, employment and assets regardless of credit history. Other rules will effectively ban loans with interest only or negatively amortizing payments.”

However, she sees things improving as we move through the year because there is less risk for the banks now that house prices are again appreciating. 

“Finally, rising house prices give lenders more breathing room to extend credit. Over the last 18 months, large lenders have loosened or left standards stable on prime loans that dominate mortgage originations, reports the Federal Reserve’s survey of senior lending officers.”

What Impact Will This Have on the Housing Market?

“Although mortgage supply will remain constrained, improved consumer credit quality combined with steady growth in jobs, low mortgage interest rates, and modestly rising house prices means that more households will be able to qualify for a mortgage. Greater credit availability will in turn help drive stronger home sales and stronger price appreciation and help keep the housing market and economy on an upward path.”