Most everyone can agree that mortgage lending standards were too loose during the housing boom and should be tightened to keep people from buying homes they can’t afford. But has the pendulum swung to far in the other direction?



A homeowner listens to a presentation about the document requirements for income and business expenses to qualify for a mortgage at the Neighborhood Assistance Corp. of America. (Patrick Fallon/Bloomberg)

Bernanke cited the Fed’s recent white paper on housing that laid out the argument in greater detail, pointing out that tight standards have yet to unwind even for prime mortgages that are eligible for government guarantees. “The extraordinarily tight standards that currently prevail reflect, in part, obstacles that limit or prevent lending to creditworthy borrowers,” the paper says. “Less than half of lenders are offering mortgages to borrowers with a FICO score of 620 and a down payment of 10 percent — even though these loans are within the GSE purchase parameters.”

Why are lenders still so cautious? The still-vulnerable economy and generally tight credit markets are probably the biggest factors, but the Fed cites a few other reasons as well — namely “the high cost of servicing in the event of loan delinquency and fear that the GSEs could force the lender to repurchase the loan if the borrower defaults.” The latter refers to the renewed push by Fannie Mae and Freddie Mac to force mortgage services to buy back loans that were issued on faulty grounds — relying, for instance, on false paperwork that misstated the borrowers’ income. The GSEs have been ramping up these so-called “putbacks” over the past year, erupting recently in a bitter dispute with Bank of America that ended the bank’s primary relationship with Fannie Mae. The Fed argues that the aggressive push helps the GSEs protect taxpayer dollars, but believes that it also “discourages lenders from originating new mortgages.”

Fannie Mae, for its part, defend its standards for underwriting and its approach to recovering money from faulty old loans. “Fannie Mae remains focused on reducing losses on the legacy book ... we are seeing positive outcomes from our actions,” Susan McFarland, Fannie’s executive vice president and chief financial officer, said in a statement today.

Even Bank of America, which has resisted many of Fannie’s mortgage repurchase demands, doesn’t think that the issue has necessarily tightened mortgage credit. “The standards were probably too loose in the beginning, and that tightening will occur. I don’t know if that’s because of the [repurchase] claims became more accelerated,” says Jerry Dubrowski, a BofA spokesman. He emphasizes that Bank of America has continued to extend loans to qualified buyers, issuing $35 billion of $150 billion mortgages last year to moderate-income borrowers. “The entire demand equation changed — it’s part of a broader economic cycle than it is any particular effort to restrict credit,” Dubrowski concludes.

Ultimately, judging whether mortgage standards are appropriate is a subjective call: Lending standards that one person might consider too tight could seem like an appropriate way to prevent people from buying houses they can’t afford. And while loosening lending standards could make more potential homebuyers willing and able to take the leap, it won’t address the more fundamental weaknesses that are holding back the housing market.