Tighter Lending Standards Are Making Home Sales More Difficult

Long Beach housing inventory/end of 2012

Although much is being said about the housing recovery, the fact is that mortgage loans are much tougher to get than in years past.

• It's just recently come out that some lenders are loosening up the requirement for equity (30% or more) for owners wanting to keep their current homes, but then, a lot of property owners just getting into the market didn't know about that rule in the first place.  It's one of the many things making it difficult for people to move on, because even if they otherwise qualify for a new mortgage, their property doesn't. 
• Another issue is FICO scores.  Higher than ever scores are being demanded of the "average" buyer and this has impacted the market to the extent that, per Laurie Maggiano of the U.S. Treasury's Homeowner Preservation Office, between 2007 and 2012, new home purchases dropped 30% for those with a FICO score over 780.  In that same period of time, new home sales dropped 90% for borrowers with a FICO score between 620 and 680. "Where are these folks supposed to live?" asked Maggiano.  (At one time, a FICO score of 700 or higher was considered very good for a borrower.)
• And then again, specific lenders have their own overlay of loan requirements.  Fannie Mae and Freddie Mac may accept FICO credit scores as low as 620, and FHA will approve applications with scores as low as 580, yet investors for the loans may require FICOs at least 60 points higher.   This issue also impacts such programs as the FHA streamline refi for borrowers with good payment histories, yet investors hamstring these borrowers by requiring full appraisals and full credit checks, even though they have a good borrowing history and are on time with payments.  Fannie and Freddie and FHA are attempting to work with these investors to stop their overlay over government loan criteria.  (Investors, by the way, lose money if interest rates are lowered on their loans.)
• The Qualified Residential Mortgage Rule is still in the works, issued last January by the Consumer Financial Protection Bureau, has not yet required a minimum down payment, but did attempt to include 20% down payment as the minimum.  Bankers and consumer groups have protested saying that will shut many credit worthy people out of the homebuying market.  This is only one of the new lending regulations to be set upon all lenders and borrowers.
• While housing inventory is being impacted by numerous issues, available and qualified borrowers who make it through underwriting are not as great in number as in previous years (see the FICO score relationship to buying above), and thus certainly making many sellers less confident about selling.  The graph above shows the decreasing inventory over time, another illustration of how we've gotten to where we are today.