Lawrence Yun, Chief Economist for the National Association of Realtors® (NAR) said Monday that there would be enormous benefits to the nation's economy if mortgage lending standards would return to normal. "Sensible lending standards would permit 500,000 to 700,000 additional home sales in the coming year," he said. "The economic activity created through these additional home sales would add 250,000 to 350,000 jobs in related trades and services almost immediately, and without a cost impact."
Yun's remarks accompanied release of NAR's monthly nationwide survey of Realtors, this month combined with an analysis from Yun's office of historic credit scores and loan performance.
The survey of Realtors Yun said, shows widespread concern over continuing tight conditions, delays in mortgage approvals, and excessive requirements for documentation. Some respondents said it appeared that lenders were focusing only on loans to individuals with the highest credit scores.
Survey respondents said 53 percent of loans in August went to borrowers with credit scores above 740 while in the 2001 to 2004 time period only 41 percent of loans backed by Fannie Mae and 43 percent of those backed by Freddie Mac were above 740. In 2011, about 75 percent of total loans purchased by Fannie Mae and Freddie Mac, which are now a smaller market share, had credit scores of 740 or above.
There is a similar pattern for FHA loans. The Office of the Comptroller of the Currency has defined a prime loan as having a FICO score of 660 and above. However, the average FICO score for denied applications on FHA loans was 669 in May of this year, well above the 656 average for loans actually originated in 2001.
A normal 12-month default rate is about 0.4 percent, the rate that prevailed in 2002 and 2003. The rate then spiked to 3.0 percent for Fannie Mae and 2.5 percent for Freddie Mac in 2007, reflecting the risky mortgages written in the 2005-2007 period. Since 2009, the 12-month default rates have been abnormally low, averaging 0.2 percent for Fannie and 0.1 percent for Freddie despite the high unemployment that has existed in the timeframe.
Under normal conditions, existing-home sales should be in the range of 5.0 to 5.5 million. "Sales this year are projected to rise 8 to 10 percent. Although welcoming, this still represents a sub-par performance of about 4.6 million sales," Yun said. "These findings show we need to return to the sound underwriting standards that existed before the aberrations of the housing boom and bust cycle, and thoroughly re-examine current and impending regulatory rules that may cause excessively tight standards."
Yun said all it takes is a willingness to recognize that market conditions have turned in the wake of an over-correction in home prices, with all of the price measures now showing sustained gains. "There is an unnecessarily high level of risk aversion among mortgage lenders and regulators, although many are sitting on large volumes of cash which could go a long way toward speeding our economic recovery. A loosening of the overly restrictive lending standards is very much in order," he said.