Ben Bernanke says mortgage underwriting standards are too tight

In his speech at Operation HOPE Financial Dignity Summit yesterday on the challenges of the housing market and mortgage lending, FOMC Chairman Bernanke expressed concerns that mortgage underwriting has become “overly tight”. 

“…Some tightening of credit standards was an appropriate response to the lax lending conditions that prevailed in the years leading up to the peak in house prices. Mortgage loans that were poorly underwritten or inappropriate for the borrower’s circumstances ultimately had devastating consequences for many families and communities, as well as for the financial institutions themselves and the broader economy.

However, it seems likely at this point that the pendulum has swung too far the other way, and that overly tight lending standards may now be preventing creditworthy borrowers from buying homes, thereby slowing the revival in housing and impeding the economic recovery.’

Borrowers who have recently purchased a home or closed on a non-streamlined refinance would most likely agree with Ben Bernanke’s views on underwriting guidelines. And for the most part, I do too. Today’s home buyer will often find every aspect of their income, assets and credit scrutinized. For example, Form 4506 (which was once used primarily for stated or no-income verified loans) is now pulled on every mortgage in process to obtain a copy of the tax transcripts for the the past two years. Any discrepancies between the 4506 and income supplied must be addressed, which often leads to the borrowers having to provide complete tax returns instead of just their W2’s. If a borrower has deposits on their bank statements that are not easily identified, they can expect to show proof of where that deposit came from. Credit reports may disclose information that the borrower may need to address as well beyond the good old “inquiry letter”. Now they disclose information about activity associated to a borrowers address that may or may not relate to the borrower. Don’t get me wrong, loans are closing however the process for some can require a great deal of patience and paperwork.

“When lenders were asked why they have originated fewer mortgages, they cited a variety of concerns, starting with worries about the economy, the outlook for house prices, and their existing real estate loan exposures. They also mention increases in servicing costs and the risk of being required by government-sponsored enterprises (GSEs) to repurchase delinquent loans (so-called putback risk).”

“Putbacks” are also referred to as “buy-backs”. And buy-backs tend to roll down hill to the source that originated the mortgage, including  banks and correspondent lenders like Mortgage Master Service Corporation. This happens when the loan (borrower) is not performing. The lender will go over the loan documents with a fine tooth comb to try to find fault in the underwriting so they can justify sending the loan (forcing a buy-back) to the originating lender. This is why many borrowers are having to over-document their finances.

The Federal Reserve’s Senior Loan Officer Opinion Survey on Bank Lending Practices indicates that lenders began tightening mortgage credit standards in 2007 and have not significantly eased standards since.

Ben Bernanke and the Fed cannot control the underwriting guidelines and overlays that banks have for mortgage lending. I certainly do not want to see the loose underwriting of the subprime era return. However I do agree that for the most part, underwriting has become pretty tight and I would welcome more “common sense” for well qualified borrowers.

Mr. Bernanke needs to brush up on Frank Dodd and how it will continue impact the mortgage industry and underwriting guidelines.

Your thoughts?

Mortgage rate update for the week of October 1, 2012

mortgageporter-economyI cannot believe it’s October, can  you? Perhaps it’s our extended summery weather we are experiencing in Seattle. This being the first week of a month means that we have the Jobs Report being released this Friday. The Jobs Report tends to impact mortgage rates as it indicates how the economy is doing and the potential for wage inflation. It is anticipated that 120k jobs were added last month – we’ll see how the numbers pencil out on Friday when September’s Jobs Report is released. Wednesday is loaded with both the ADP National Employment Report and the release of the FOMC minutes.

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The Fed Says…Let’s Twist

No surprise that the FOMC is not making any changes to the Fed Funds rate. What may have surprised some is the Fed’s focus on trying to keep mortgage rates low with it’s purchase of mortgage backed securities.  From today’s press release:

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.

….If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities….

The efforts to keep mortgage rates low will be in contrast to the increase in the “g-fees” by Fannie Mae and Freddie Mac. It will be interesting to see how much of an impact the Feds efforts will make.

Stay tuned for Ben Bernanke’s press conference happening in a few hours. Meanwhile… let’s twist!

What may impact mortgage rates the week of September 10, 2012

Although at first glance, this week may seem like there’s not a lot scheduled that may impact mortgage rates, what is scheduled is significant. We have the FOMC meeting winding up on Thursday following last Friday’s weaker than expected Jobs Report. Friday is packed with reports that may reveal signs of inflation, which tends to drive mortgage rates higher. 

Here are some of the economic indicators scheduled for this week:

Thursday, Sept. 13:  FOMC Meeting; Producer Price Index (PPI); Initial Jobless Claims

Friday, Sept. 14: Retail Sales; Consumer Price Index (CPI); Consumer Sentiment Index (UoM)

For your personal mortgage rate quote for your home located anywhere in Washington state, please contact me.  

You can also follow me on Twitter or Facebook where I provide live rate quotes and mortgage tid-bits throughout the day.

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Mortgage rate update for the week of August 20, 2012

Mortgage rates have been trending higher over the past few weeks (they are still very low).  Here are some of the scheduled economic indicators that may impact mortgage rates this week:

  • Wednesday, August 22: Existing Home Sales and FOMC Minutes
  • Thursday, August 23: Initial Jobless Claims and New Home Sales
  • Friday, August 24: Durable Good Orders

As I write this post (9:00 am PST) the DOW is at a 4.5 year high (13,260). Remember that as the stock markets improve, you will see investors trade the safety of bonds (like mortgage backed securities) for the possibility of higher returns of stocks. This will cause mortgage rates to trend higher as will signs of inflation or that the economy is improving.

Clients often ask me if the government controls mortgage rates and are surprised to learn they do not. The government has been involved with buying mortgage backed securities which is manipulating mortgage rates to lower levels however, they do not directly set mortgage rates. The Fed does set the Fed Funds Rate, which impacts the rates for HELOCs but not mortgage rates. 

Mortgage rates often change throughout the day. Last week, there were days where one of the lenders I work with issued three to five changes in just one day.  

Santa Ben and the FOMC Deliver Lower Rates

Just in time for the holidays, the FOMC surprised everyone by cutting the Fed Funds Santaben rate to a range of zero to 0.25%.  This 0.75-1.00 reduction is more than the widely anticipated 0.50% rate cut.  The Fed also reduced the Discount Rate by 0.75% to 0.50%.

Bernanke and the FOMC didn’t stop with the giving there…they reiterated their commitment to buying mortgage backed securities which keeps mortgage interest rates low.

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