10.20.2014 1

What credit tightening? Where?


By Robert Romano

“When former Fed chief Ben Bernanke has trouble refinancing his mortgage, you know there’s a problem.”

That was Bloomberg View’s Barry Ritholtz on October 17, commenting on the supposed shortage of mortgage credit in the current U.S. housing market.

“Banks have avoided making loans to many qualified borrowers, regardless of their credit history, income and ability to service that debt,” wrote Ritholtz in an aptly titled column, “Just try to refinance. I dare you.”

That is certainly a claim that has been made. That, somehow, the housing market would be roaring back right now, but lenders are just being stingy. Credit’s too tight. Nobody can get a loan. But is it true?

Bernanke’s refi troubles are probably not sufficient evidence since, for starters, he is not at all a representative sample of the U.S. refi market.

According to the Wall Street Journal’s Nick Timiraos, “[Bernanke] refinanced the mortgage on his Capitol Hill house since he and his wife bought it in 2004 for $839,000, once in 2009 and again in 2011. Credit is no tighter now than it was then and home prices have gone up.”

So what gives? Timiraos continues, “One thing that may have changed for Mr. Bernanke besides his employment situation: His loan might be too big to qualify for government backing. The Journal reported in 2011 that he owed $672,000 on his mortgage after refinancing it that September.  The refinance closed days before the conforming loan limit — the maximum amount that qualifies for backing from Fannie and Freddie — in the Washington, D.C., area dropped to $625,500, from the previous limit of $729,750.”

Therefore, in order to qualify for the refi, perhaps Bernanke needed to have more equity in his home.

That is not unusual, and is similar to requirements for lower-income borrowers looking to refinance in order get out from under Personal Mortgage Insurance in an FHA loan by needing to have acquired a loan to value ratio of less than 80 percent. Not enough equity, you don’t get the refi.

Yet, somehow Bernanke’s story is used to peddle the false narrative that nobody can find a loan because banks are too tight.

Surely, it is tighter now than it was ten years ago. Because back then, banks were making stupid loans based on little to no income documentation and insanely high property valuations that markets could not sustain.

Since then, the underwriting process has become far more rigorous. More documentation is required. Perhaps more than is necessary, but financial institutions currently have risk portfolios they feel comfortable with. That doesn’t mean conditions are too tight. It means they are implementing prudential lending standards.

Assuming an individual can document steady income via employment, a sound debt service history, and a good enough credit score, mortgage credit is more than available both for home purchases and for refinance loans.

Sounds like a fair process. And hopefully one that will prevent stupid loans from being made that contribute to unsustainable property values. It’s a good thing banks have learned something from the financial crisis.

The fact is, demand for housing — and thus for mortgages — is depressed compared to what it was during the heyday of the housing or even a year ago.

This is evidenced by existing home sales, measured by the National Association of Realtors, which were down 1.8 percent in August alone, and down 5.3 percent compared to a year ago. What happened?  Home values increased, and sales dropped off.

In 2013, home sales had surged 9.2 percent off of lower home prices, and credit was no tighter than it is in 2014.

You see, prices matter. This too can be seen in the refi market. When the stock market was tanking last week, interest rates dropped very suddenly. And guess what happened? The refinance loan index surged 11 percent, according the Mortgage Bankers Association (MBA).

“Growing concerns about weak economic growth in Europe caused a flight to quality into US assets last week, leading to sharp drops in interest rates.  Mortgage rates for most loan products fell to their lowest level since June 2013,” said Mike Fratantoni, MBA’s Chief Economist.  “Refinance application volume reached the highest level since June 2014 as a result, with conventional refinance volume at its highest since February 2014.”

The MBA also reports in its credit availability index that lending is still more available now than it was just two years ago when it laid down its benchmark.

So, perhaps the supply of credit is just fine. It may just be the price of credit that needs to come down to meet market demand.

Robert Romano is the senior editor of Americans for Limited Government.

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