New Housing Proposals Will Only Make Credit Conditions Tighter – Report

Dr. Kenneth Rosen, Chairman, Fisher Center for Real Estaternand Urban Economics and Professor Emeritus, University of California, Berkley emergesrnas a bit of a contrarian in an article in RealtyTrac’s March Housing News Report.  Rosen says he is concerned that the newrnhousing finance system that is being built will only serve to sustain today’srntight credit conditions, in itself a situation he calls unsustainable.</p

He describes the housing market as functioning as a “virtuousrncycle;” the first time homebuyer progresses to the trade-up buyer and on to therndownsizing buyer.  However there is a lotrnof stickiness in this system and systemic problems that perpetuate sluggishrnsales.  Low savings for downpayments arernpart of the problem, but a larger obstacle is the current state of the mortgagernmarket.</p

The federal government is supporting nine out of ten loansrnand private lenders are lending only to the well-off but both sectors arernsimilarly focused on borrowers with high credit scores and even FHA scores havernincreased substantially since 2009. rnCredit this tight leaves many buyers on the sidelines and now there arernthe new regulations that went into effect in January that are reframing thernunderwriting process.</p

Rosen said he understands the reasons behind the tightrncredit conditions and new Federal standards but appears to consider them anrnoverreaction.  He calls the pre-crisisrnperiod of 2004 to 2008 highly unusual in that high risk was driven by the expectationrnthat house prices would continue to rise. rnWhen they did the exact opposite for the first time nationally since thernGreat Depression both risky loans and traditional ones went south and homernvalues went negative. </p

There were 4.5rnmillion foreclosures and the worst credit damage was done to low andrnmoderate-income households.  That the riskier loan structures have been eliminated is a good thing, Rosen says.  But “that we have createdrna system where credit is limited to those who are better off is simply notrnsustainable going forward.”  He maintainsrnthat the 2004 to 2007 bubble years, far from being the norm, were an aberrationrnin five decades of successful lending and that more than 40 years of experiencernproves, credit can be mad widely available with strong underwriting and goodrnperformance.</p

Before credit scores dominated a lender would look atrnemployment and other compensation factors to approve a loan.  Now lenders will be looking for each borrowerrnto achieve certain parameters for QM safe-harbor and deem other borrows ineligible.  Under the old rules a 620 FICO with 5 percentrndown was an insurable prime loan, today 680 is the new 620.  “That line of demarcation is simply too high</band squeezes too many families into higher cost loans or out of the housingrnmarket completely."  He said the concernrnis that many low and moderate income families will be forced to remain renters,rnnot by their own choice, but as a result of the cumulative impact of regulatoryrnrules seeking to create a limited risk environment.  </p