It’s wild to think that a strawberry picker who earned $15,000 qualified for a $720,000 mortgage in 2005. But it’s just as ridiculous to think that a buyer with a credit score of 720 and who can put 20% down may not have qualified for a loan in 2010. After the subprime mess of 2008, credit standards went from one extreme to the other. “I do think that conditions are still too tight for the health of the financial system, the construction industry, and our economy,” said Federal Reserve Chairman Ben Bernanke last week as he addressed the National Association of Home Builders. “Normal lending is a big part of getting the economy back on its feet.” Thankfully, however, we’re starting to see small signs that banks are slowly returning to “normal lending.”
As of June 2011, one in six real estate deals were falling apart due to financing, according to a survey by the National Association of Realtors, whereas before it was one in 25 in good years. During the Recession, 760 became the standard credit score for approved mortgages. And sometimes even 30% down wasn’t enough to qualify for a jumbo loan — banks were denying small-business owners who had more than that on deposit. While FHA loans only mandate a credit score of 580, many borrowers were turned away because of “overlay” requirements they initiated.
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“As regulators, we have been very clear to the banks … that we want them to take a balanced approach. We want them to make prudent loans and we don’t want them to turn away creditworthy borrowers,” said Bernanke.
The Fed has tried to return banks to normal lending practices by promising to keep interest rates low until 2014. According to the Freddie Mac Index, the average 30-year fixed rate is 3.87%, the lowest it’s been in 40 years of the index. Perhaps these low rates combined with lower credit standards are finally enabling borrowers to borrow.
According to MortgageDaily.com’s 2011 Mortgage Lender Ranking, loan originations amounted to $381 billion by all lenders in the fourth quarter of last year, up from $317 billion in the previous quarter. In 2011, the government essentially originated 90% of loans through FHA and Fannie and Freddie, as compared to 97% the year before.
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While those with better credit scores will also get the best financing options, Wells Fargo confirmed that as of January, it is approving applicants with a score 580 and 3.5% down. This is important for getting many first-time buyers into the market when they usually aren’t able to make a sizable down payment.
Outside of housing, looser credit standards seem to be more common. The car industry attributes the rise in sales, in part, to loans being made to subprime borrowers with scores from 550 to 619, which made up 40% of car loans in the fourth quarter of 2011. According to the Wall Street Journal, personal loans are also up for the first time in almost a year.
Bernanke said that home values are still falling, in part due to tight credit with buyers who are either unable to enter or move up in the market. He added, “No single solution will be sufficient. But sustained efforts to address the many interlocking factors holding back the housing market will pay dividends in the long run.”
Perhaps the fact that banks are now stepping up to do their part is spreading optimism through the industry. In a report released Wednesday, home builder confidence approached a five-year high this month, another good omen for the struggling housing market.