Tight Mortgage Credit? Gimme a Break

The great rumor running around the Internet and who knows where else is that it's difficult to get a mortgage because "credit is tight."

But the fact is there's no shortage of FHA mortgages, we're not running out of VA loans and when last anyone looked there was no lack of conventional financing.

It's hard to imagine how the "credit is tight" rumor got started or who benefits. Mortgage credit is readily available to qualified borrowers. If this were not the case then how is it possible that mortgage rates have been near record lows for past several months or that existing home sales in January were 9.1 percent higher than a year ago? In a logical world wouldn't "tight credit" mean materially fewer loans and higher rates?

"Part of the tightening in mortgage credit standards," says Elizabeth A. Duke, a Federal Reserve governor, "is the result of lender fears about the economy and the trajectory of house prices. Of respondents who reported tightening mortgage lending standards in the April 2012 Senior Loan Officer Opinion Survey on Bank Lending Practices, more than 80 percent identified concerns about the economy or house prices as a factor in their decision."

Why should mortgage originators have fears? After all, it's the Federal Reserve that's buying $85 billion a month in long-term debt, thus creating an instant market for new loans. Where is the risk to loan originators in such an arrangement?

Credit for potential home purchasers with lower credit scores, says Duke, "has likely also been affected by capacity constraints of mortgage lenders. As most of you know very well, the mortgage industry has been operating near its capacity. Although purchase originations have been subdued, refinancing originations, according to staff estimates, have responded to record-low interest rates by more than doubling from mid-2011 to the end of 2012."

Sorry, but this doesn't sound like much of a problem. If the lending industry is overwhelmed by demand then the solution is to hire more loan officers and underwriters. You don't see Apple laying off people because it fears more iPhone sales. Meanwhile, according to the Wall Street Journal, the banking industry is actually closing branches, a trend which hardly helps with capacity issues.

Governor Duke also argues that "when refinancing demand is high, lenders have less incentive to pursue harder-to-complete or less profitable loan applications. In the current environment, refinance applications by high-credit-quality borrowers -- many of whom may have refinanced repeatedly as rates have fallen over the past couple of years -- are likely the easiest to complete. And refinances under the revised Home Affordable Refinance Program, require substantially less documentation than other loans. 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."

Lenders plainly go after harder-to-complete loans, just look at the self-employed borrowers who are readily able to get financing. The fact that a given loan requires more paperwork does not mean the borrower is less creditworthy or that less credit is available, it only means that to properly underwrite the loan a lender has more blanks to fill in. If you're in the loan origination business that's what you do.

What lenders are not doing today is going after unqualified borrowers. That's not evidence of tight credit, Instead, that's evidence of a better marketplace, one with less risk.

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